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Lexington Bankruptcy Blog

Understand credit card debt before filing for Chapter 7

Some 43 million Americans carry a balance on their credit cards, estimated to make up about 22 percent of all credit card users in the country. Kentucky residents who count themselves in that number could be laboring under the false notion that carrying a balance can help improve a credit score. Unfortunately, this is nothing more than an enduring myth, and could land consumers in serious debt. Options like Chapter 7 bankruptcy can help to eliminate that debt, when financial circumstances warrant that relief.

The major drawback of carrying a credit card balance is interest. Most Americans carry a balance in the mid-$6,000 range. With an average national APR of above 16 percent, this can translate into hefty interest payments that can limit a card holder's ability to pay down the debt. Contrary to the myth, the higher amount of debt an individual carries on a credit card compared to their total limit, the poorer that person's credit score becomes.

The ins and outs of filing for Chapter 7 bankruptcy

The prospect of filing for bankruptcy can be destabilizing for the average American citizen. This is partly because, here in Kentucky and elsewhere in the nation, people are not properly educated on what is involved in the process of Chapter 7 bankruptcy filing. The truth is, bankruptcy can represent a fresh start to an individual or business struggling with mounting debt, but it is important to have the right information going into the process.

The first criterion for a successful bankruptcy filing is determining what kind of filing is appropriate. For many people, a Chapter 13 filing, which consolidates debts under a repayment plan, is the preferred option, but for those dealing with extreme debt, Chapter 7 might be the best bet. No matter what kind of filing is selected, the debtor must attend credit counseling before filing.

Why waiting for Chapter 7 can be financially damaging

Bankruptcy does not have the best reputation in the public consciousness. Here in Kentucky and elsewhere in the nation, individuals in debt are often under the mistaken impression that a Chapter 7 filing is something to be avoided even in cases of extreme debt. Many experts disagree. In fact, they suggest that the longer an individual in debt crisis waits to file for bankruptcy, the longer lasting the financial damage can be. 

The period of time prior to a bankruptcy filing is often referred to as the "sweatbox" period. During this time, a debtor could be facing harassment by collections agencies and, in some cases, even lawsuits. Often, people will forgo necessities like food during these periods, all in an effort to stave off bankruptcy. The truth is all they are really doing is depleting assets that could be used to help them out of this financial quandary. 

How would you react to a sudden job loss?

What if you went to work next Friday and your boss called you into his or her office and told you it was your last day on the job? What would you do? How would you react?

Keep in mind that you may have had this job for years or even decades. You are a good worker. You never saw any signs that you were going to get fired. No one warned you. It happened suddenly and for reasons beyond your control.

Chapter 7 not the only option for debt relief

Of all the debt owed by American families, credit card debt is among the most persistent. With the average Kentucky family paying upwards of 20 percent interest on their credit cards, some families are being pushed so deeply into debt they are struggling to get back out. Thankfully, many strategies exist to help those families recover, from simple planning through to a Chapter 7 bankruptcy filing.

One of the most important parts of a debt recovery plan is the building and maintenance of positive spending and saving habits. For some people, this means limiting dinners out and other luxuries, while for others, it requires further planning. A good way to start chipping away at debt is to avoid the temptation to pay only the minimum amount due on a balance. This could take months or even years to pay down, and it will cost tremendous amounts in interest.

Is Chapter 7 bankruptcy a better fit than Chapter 13?

For many Kentucky residents, making the decision to file for bankruptcy is incredibly difficult. Many have tried to gain control of their finances for years before they give bankruptcy serious consideration. Once they decide to move forward, the next step involves determining whether Chapter 7 bankruptcy or Chapter 13 is a better fit for their needs. 

The primary difference between the two lies in how existing debts are handled. With Chapter 7, many types of unsecured debt are completely eliminated through a process known as discharge. That means that those obligations will no longer exist and do not need to be repaid. 

Handling credit debt in the face of Chapter 7 bankruptcy

Credit card debt is the most pervasive and common form of debt faced by the American people in this day and age. Here in Kentucky, individuals and households rack up tens of thousands of dollars in debt per year, leading many to seek out the best possible solution to the problem. While Chapter 7 bankruptcy filings have a proved track record of helping people get back on financial track, there are other options available in advance of such a filing. 

The first step, of course, is to acknowledge that a debt problem exists at all. Many people choose to ignore bills (and even bill collectors) until the problem has become nearly insurmountable. Taking stock of existing debt and developing a comprehensive plan to handle it is a good first step. In some cases, high-APR credit cards can have their balances transferred to cards with a lower interest rate.

Chapter 13 offers many advantages over Chapter 7

Any time you consider a bankruptcy, it is often difficult to remain objective and keep a clear head about the process. Not only is bankruptcy a complicated process, those who use it must submit to financial restrictions for a number of years, and must often forfeit many of their possessions along the way.

However, for those who have significant income and simply need some assistance paying off their debts in a structured manner, Chapter 13 may offer needed relief without imposing all of the harsh restrictions that the public generally associates with bankruptcy. In most cases, when the public refers to bankruptcy, they are really thinking about Chapter 7, which is both the most widely available and also the form that requires the greatest sacrifices from the debtor.

Dicharging student loans through Chapter 7

College students across the country deal with challenging debt loads when they leave academia and enter the working world. Indeed, student debt is a major issue for politicians and educators alike. It is generally accepted that student loans cannot be discharged through a Chapter 7 bankruptcy filing, but Kentucky students may be buoyed to learn that in some instances, student debt is in fact eligible for discharge.

In order to circumvent the statutes put in place by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a student considering a Chapter 7 bankruptcy would have to prove the student loan specifically was causing what is called "undue hardship." In order to prove this, the filer must first document that he or she is unable to maintain a minimal standard of living, individually or for any dependents based on one's current income and expenses. The individual must also prove this situation is not likely to change significantly.

Chapter 7 not the end of the financial road

Many Americans have a tendency to view bankruptcy with no small degree of skepticism, if not outright panic. Of course, debt can spring from a variety of unforeseen sources. Thankfully, there are ways to speed up the process of returning to financial health even after a Chapter 7 bankruptcy in Kentucky. 

Bankruptcy filings can stay on a credit report for up to 10 years, but this is a maximum, not a requirement. In some cases, it is possible to file a dispute with the credit bureau that can have the bankruptcy removed from the credit report altogether; however, this requires evidence that mistakes were made in the report. Every element of the report, especially personal information like Social Security numbers, must be accurately included. If errors are found, a dispute can be filed.