Bankruptcy and Divorce FAQ
These frequently asked questions are presented by Hamilton Debt Relief.
Which should be filed first, bankruptcy or divorce?
Experts would say to file bankruptcy first, see it through, and then file for divorce. Although that may not be the prescription for everybody, that makes a lot of sense, strategy-wise for the simple reason that, after divorce the ex-spouses would not communicate anymore. The gap would be widened and that may get in the way of sorting out the debt problems.
Why bankruptcy?
After having gone through some serious debt assessment, from financial or debt consultants-perhaps even a bankruptcy lawyer, couples who wish to eliminate their debt choose bankruptcy because it's the best solution for their financial situation. Had the debts been mostly unsecured, meaning credit card debts and utility bills, then bankruptcy would not be the first choice. There are alternatives to a bankruptcy that the government endorses one of which is credit counseling. In fact, before consumers are admitted to the bankruptcy forum, they have to undergo a mandatory credit counseling class, to learn more about debt management relief.
What is credit counseling?
Credit counseling is a non-profit debt relief program that educates consumers about financial control or debt management. It is usually free but for a very small fee. It only costs when it's determined, via assessment, that a consumer's debt problem is beyond simple budgeting. Credit counseling has a program called Debt Management Plan (DMP) in which an enrollee pays $25/month for three to five years. The program negotiates the consumer's interest rates so as to get to the principal amount of debt much quicker. The program requirement s are current accounts and a total debt amount of less than $10,000. Another alternative to bankruptcy for unsecured debts is debt settlement. In a way, debt settlement is closer to bankruptcy, than credit counseling because its enrollment requirements are fit for desperate financial situations. Enrolling in a debt settlement program has a hint of desperation in it as if the consumer is on the brink of filing bankruptcy although it appears as if, a bankruptcy is much too drastic a debt relief solution for unsecured debts.
What is debt settlement?
Debt settlement is a debt relief program that negotiates the entire balance rather than just the interest rates (credit counseling DMP). Its enrollment requirements are a total debt amount of $10,000 and accounts that are past due or almost past due. There have been some controversies about the latter requirement. Critics of debt settlement are saying that the settlement program puts the consumer in a possible legal problem by asking them to stop all payments to the creditors. It's true that there's a big possibility that a creditor would sue the consumer for non-payment but that's not to escape payment entirely. If a consumer negotiates his balance with the creditor while still current on his account, his request to pay for less than what he owes, would be declined. It would only be accepted if it amounts to 75% of his total debt amount-which he clearly doesn't have. Five to six months-straight of non-payment forces creditors to write the debt off as mandated by the IRS. They lose profit in doing so but will get a tax break. To get at least a portion of the debt back, what creditors do is endorse the charged off account to a third party collector to hound the consumer to pay (within the bounds of the FTC). The logic is simple as to why credit counseling is favored over debt settlement in credit counseling, they get the full amount owed them, but in debt settlement, especially if the account charges off, they only get 30-70% of the original amount owed. So what if debt settlement won't cut it for the consumer? What if the creditor sues the consumer for non-payment?
What if the debt type is a combination of unsecured and secured?
Then the consumer might be better off filing for bankruptcy. Bankruptcy can eliminate most of unsecured debts if not all, and some other debt types.
What is bankruptcy?
Bankruptcy is a government sponsored debt relief program for deserving consumers. What does deserving mean? It means that there are qualifications in the program that consumers must meet. Thre are two consumer type bankruptcies. Chapter 13 this is the common bankruptcy type. It's also known as a reorganization or repayment bankruptcy, as through it, creditors/lenders would get the maximum amount owed them. Unlike in Chapter 7, wherein most debts are discharged and creditors/lenders don't get the maximum amount owed them, only what the liquidation of the consumer's assets amounts to. Chapter 7 this used to be the favored bankruptcy as it can discharge most debts, but after the 2005 bankruptcy law amendment, consumers may no longer file this chapter not unless they pass the means test.