A reader, Rae, had this question about declaring chapter 13 bankruptcy:

I have charged quite a bit in the last month, thinking I was gonna get a large sum of money. Now I find out it’s only a few thousand, and to top it off, my husband has left me. I am thinking about filing chapter 13 bankruptcy now because there is no way I can pay for everything. But I’m a scared they will think I went on a shopping spree knowing this. What do you suggest?

Rae,

If you were to declare bankruptcy right now, it could very well look to the courts like you charged up your cards with no intention of paying them back. This is considered fraud, and you will want to be very careful about that.

In a bankruptcy case, each of your creditors gets a say – they get a notice in the mail that says you are declaring bankruptcy, and they have the right to appear before the court and ask that their account not be included, or have special arrangements made for repayment. It’s extremely rare that this happens (especially if you had a low limit with them), but creditors who see that you charged large balances only a month before a bankruptcy might be tempted to appear.

Now that said, there is a little more information I can give you about bankruptcy. There are six different chapters of bankruptcy, but Chapter 13, or Chapter 7 will be the ones you are concerned with.

In a Chapter 13, the court will approve a reasonable plan that will allow you to repay your debts over several years.

In Chapter 7, you make no repayment plan, and are absolved of your debt. You will need to talk to a lawyer to decide which Chapter fits your situation. If you have assets that you want to protect (your home, your car, etc.) then Chapter 13 is probably your best option. Again though, I am not a bankruptcy lawyer, you will need to speak with one of those before you make a decision about declaring bankruptcy.

Other alternatives to bankruptcy:

I went through a chapter 7 bankruptcy almost three years ago. I can tell you from personal experience that it was not fun. I still feel guilty about it, and wish that I had been able to arrange to pay my debts. Aside from that, it takes several years to rebuild your credit after a bankruptcy, and ten years for the bankruptcy to stop showing up on your credit report. It’s a serious, serious decision.

If there is a way that you could pay back what you owe sometime in the next five years, you may be better off trying to negotiate with your creditors yourself than declaring bankruptcy and ruining your credit.

You can get help too:

There are companies that exist solely to help you cut down your debt. They are usually called debt negotiation experts, or debt reduction experts. They will have to close your credit cards if they negotiate for you (which will lower your credit score). However, they can reduce your total debt by as much as 50%.

I am sorry to hear about your husband. Clearly your financial picture will change for a while. If you are having trouble making your monthly payments, talk to a debt negotiation person first, and see what advice they have for you. They might be able to help you reduce your payments enough that they are affordable again.

Barring that, please do talk to a lawyer about bankruptcy, and be sure you clearly understand what it will involve, not only to declare, but also the fallout and effort to repair your credit.

Thanks for your question.

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This entry was posted on Thursday, April 23rd, 2009 at 14:30 and is filed under Bankruptcy FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.