Q. I can never seem to get ahead of my credit card debt. At what point should I consider bankruptcy? — Falling behind
A. You’ve got plenty of thinking to do before you turn to bankruptcy.
First, you need to take a close look at your budget.
If you have a regular source of income, you need to determine how much monthly excess income you have to dedicate to credit card payments, said Ilissa Churgin Hook, a bankruptcy attorney with Hook & Fatovich in Wayne, N.J.
“Many people are surprised when, after taking the time to prepare a written budget, they see on paper how much money they are spending on 'extras,'” Hooks said. “Perhaps you have room to reduce your discretionary spending in order to dedicate more money to paying off your credit card debt.”
(You can see how long it will take you to pay down your credit card debt using the Credit.com credit card payoff calculator.)
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If you can’t find savings in your budget, or if it will take you many years to pay off the debt while interest and fees continue to accrue, you may want to consider a bankruptcy filing.
You first need to decide which chapter(s) of the bankruptcy code you qualify for, and which chapter is best for you. That determination will require a complete analysis of your assets, liabilities, income and expenses, Hook said.
Most individuals seek relief either under Chapter 7 or Chapter 13 of the United States Bankruptcy Code, Hook said.
“Generally, in a Chapter 7 case, a debtor seeks a discharge from his/her debts in exchange for exposing his/her assets to an examination by a third-party Trustee, who acts as a fiduciary for creditors,” Hook said.
One of the Trustee’s obligations is to look for assets that have equity — after taking into account the costs of sale, any liens against the asset, and any relevant bankruptcy exemptions — that can be liquidated to pay creditors, she said.
That means you need to consider if any of your assets would be at risk — liquidated by a trustee — if you were to seek a Chapter 7 discharge of your debt, Hook said.
Hook said that you can only receive a Chapter 7 discharge (pursuant to which the credit card debt would be discharged or “wiped out”) once every eight years. Therefore, you need to consider whether you should use that opportunity now, or wait.
Further, not all individuals qualify for Chapter 7, depending on household income and expenses, she said.
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In a Chapter 13 case, an individual or a married couple with regular income can reorganize his/their debts while retaining assets, Hook said.
“A Chapter 13 case usually lasts three to five years and allows a debtor to repay his/her debts over time via a court-approved payment plan,” Hook said. “The length of the Chapter 13 plan depends on the debtor’s income and ability to make monthly payments.”
She said additional interest on unsecured debts such as credit cards and medical bills does not accrue during the life of the Chapter 13 plan.
A Chapter 13 debtor must demonstrate to the court that he/she can pay monthly expenses including rent/mortgage, utilities, food, auto expenses and more as they become due, and have a surplus to dedicate to paying at least a portion of their old debt.
Hook recommends you consult an experienced bankruptcy attorney regarding all of the relevant facts of your specific situation.
You should also look into a reputable credit counseling firm, which may be able to help you create a debt repayment plan without a bankruptcy. (Editor's Note: A bankruptcy will impact your credit for years, depending on which type you opt to use, but your credit score will recover over time. You can monitor your bankruptcy's affect on your credit scores for free on Credit.com.)
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