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Defeating debt

By Don Chance

 

Issue #82 • July/August, 2003

"Money does not solve money problems." — Dr. Phil McGraw

For many, if not most, people yearning for the self-reliant life, a heavy personal debt load is the single biggest barrier to realizing the backwoods dream.

There are plenty of conventional methods for reducing accumulated debt, and some of them will be discussed later. But perhaps the quickest and least stressful escape from under that interest-hungry debt monster for many (outside of winning the lottery, of course) is plain, old-fashioned, American-style personal bankruptcy; or Chapter 7, as it's better known in legal circles.

Usually considered the degrading, shame-laden financial equivalent of chewing off a leg to escape a bear trap, Chapter 7 Bankruptcy is probably one of the most maligned, misunderstood, and misrepresented aspects of personal financial management there is.

But one thing it's not is unusually rare, especially in these uncertain economic times. Almost two million Americans are expected to file for Chapter 7 Bankruptcy in 2003.

Not everyone seeking financial freedom through personal bankruptcy can qualify for Chapter 7 (though they might qualify for Chapter 13, but more about that later). You are, after all, asking the courts to eliminate debts you knowingly incurred yourself. But for those who do qualify—and the guidelines are usually fairly broad—there are many valid motivations for filing Chapter 7. The most common reasons are: unexpected periods of prolonged unemployment; the tendency to max out credit cards during those times; sizeable ongoing medical expenses; unforeseen expenses such as lawsuits or other legal problems; and for many, the particularly disheartening marital strife that often comes with heavy debt burden.

(But don't forget, bankruptcy flags stick out prominently on personal credit reports for 10 years.)

Still, the ongoing roll call of famous names publicly announcing to the world that they are flat busted and can no longer pay for the lavish lifestyles they appear to live is almost as legendary as some of the individual personalities themselves. From President Ulysses S. Grant to Burt Reynolds, Anna Nicole Smith, Kim Basinger, Larry King, Rush Limbaugh, Willie Nelson, on and on, thousands of prominent public figures have faced bankruptcy court. Even so, many of them seem to retain those lavish celebrity lifestyles after declaring bankruptcy, and go on living large even as their financial statements and earnings records become juicy tabloid fodder.

How?

Easy: they follow the law. But it has to be done juuuust right.

First, though, this article in no way advocates bankruptcy as a desirable debt reduction plan for everyone, nor is it presented with the assumption that everyone reading it is automatically in serious financial trouble and needs or wants something as drastic as personal bankruptcy in order to survive. The idea here is merely to offer one among many legal methods of attaining the financial freedom it takes to build your dream before it's too late, and it barely scratches the surface of this highly complicated subject.

So let's get to it.

Chapter 7

Essentially, Chapter 7 Bankruptcy can be loosely defined as a perfectly legal court proceeding available to those in a financial crisis, and is a pragmatic means of becoming debt-free in order to facilitate a fresh start (as opposed to Chapter 13 Bankruptcy, which is structured to provide more of a "breathing space" for those who choose to meet their credit obligations; or Chapter 12, which is only available to farmers who don't have large non-farm related debts).

But, like legally declaring yourself a corporate entity in order to take advantage of certain tax breaks, Chapter 7 Bankruptcy is available, with all its restrictions, positives and negatives, to anyone willing to pay the $200 filing fee, then follow—to the letter—the intricate legal procedures and qualification rules involved.

Getting started

As with serious healthcare issues, the first thing to do when deciding to pursue personal bankruptcy is ignore those debt counseling commercials you see on television and seek out a specialist—in this case an experienced bankruptcy lawyer. You're not specifically required to get legal representation, and many filers don't. But Chapter 7 Bankruptcy is a Federal court proceeding, with different states imposing unique spins on its various guidelines and exemptions, making it a highly exacting legal specialty that almost demands some kind of expertise.

Sure, you might pay what seems like a pretty steep lawyers' bill (as much as $1,500 or more), but you will probably save many, many times that amount by hiring a skilled specialist, and save yourself much of the emotional stress any complicated legal action can cause. (Initial consultations are generally free, and most lawyers will set up payment plans. But the penalties for non-payment by such obvious credit risks as bankruptcy filers are usually astoundingly stiff; so you'd better pay up even if you have to miss an occasional meal.)

Also, it wouldn't hurt to schedule a half hour with a good independent personal financial consultant. There are usually plenty of them listed in the Yellow Pages, and they can usually provide an encouraging second opinion.

The second absolutely necessary chore, especially if you don't choose to hire a lawyer, is self-education. The World Wide Web provides perhaps the greatest source of research materials ever devised by mankind. Everything about everything is out there on the 'net somewhere, and it only takes typing in a couple of keywords to bring up thousands of pages of information.

But be careful. Most bankruptcy-related websites do offer a few good nuggets of information, but almost all are fronts for either pro or con agendas, and survive primarily by generating a false sense of urgency. Those against bankruptcy will typically end up offering some fee-based alternative, and those favoring Chapter 7 will usually offer some "secret shortcut" plan or eBook for sale. But, by comparing those little informational gems all the sites give out as bait, you should get a pretty clear picture of the true facts.

Don't have access to a computer or other internet-capable device? Go to the library. Public libraries are usually well-stocked with plenty of titles on personal bankruptcy, and college libraries have whole rooms dedicated to legal and business issues.

But, unless you know the person very well, and share a really strong friendship, it's not a good idea to ask a friend or relative who's gone through the process about it. For many people, personal bankruptcy still carries an unwarranted stigma (perpetuated, of course, by lenders), and can become such a taboo conversation subject that even the strongest friendships might suffer.

Stick with agenda-neutral sources, and you'll come out better informed.

Let's do 'er!

Once you've made the decision to proceed, you have two choices: prepare all the legal forms and documents yourself (if you choose to represent yourself), or turn everything over to your lawyer and follow his exact instructions.

The Federal court for your district will supply all the forms and informational brochures you need to get started at filing time, but you'll still have the same basic set of questions everyone else has: what can you expect to keep, and what can you expect to lose?

Through personal bankruptcy, you can

  • Usually keep your family home and vehicles if you own them outright or are buying them on credit.
  • Keep most of your credit-obtained personal belongings, household goods, and tools and/or supplies used in making a living, depending on your state guidelines.
  • Expect to keep your bankruptcy reasonably confidential. (Sure, Chapter 7 Bankruptcies are publicly recorded court procedures, and will definitely show up on credit reports. But someone would have to search out your specific records to find them; and even then, the records couldn't be used to discriminate against you.)
  • Get credit again. (After 10 years, a bankruptcy can no longer appear on your credit report—and in some cases, a bankruptcy may even improve your credit rating. But you can qualify for secured credit card programs almost immediately by depositing a few hundred dollars in a bank or other lending institution, then opening a credit card account with the cash as secure collateral. In fact, in many states you can even apply for a home or farm mortgage just two years after filing and, if your personal income situation is healthy and you meet the down payment requirements, often get the loan under the same terms and conditions as anyone else.)

But you cannot

  • Keep the credit cards or non-card credit accounts you discharge through bankruptcy.
  • Stay in a rented house or apartment, or keep a leased car, without making special arrangements with the owners.
  • Buy real estate on credit one week, then declare bankruptcy the next. (You must wait at least 60 days after making a major credit purchase such as property or an expensive vehicle to file, but even then you will almost certainly be suspected of attempted fraud.)
  • Discharge debts you forget to declare. (So get it right the first time.)
  • Wipe out child support or alimony payments and/or penalties.
  • Be free of fines, penalties, judgments and criminal restitution resulting from illegal activities such as drunk driving, embezzlement, traffic violations, and so on.
  • Shrug off student loans. (Those were made with the understanding that they were to be used in obtaining a means of earning a living, and so are assumed to be money makers no matter how you actually used them.)
  • Expect to hang on to non-essential big ticket luxury items you're making payments on, such as a cabin cruiser boat, that beloved new touring motorcycle, a hobby racecar, a fishing shack, an RV, or any other unnecessary dollar-gobbling playthings. (Check with your lawyer, though; some states just may allow some of them.)
  • Eliminate unpaid bills on regular utilities such as water, electricity, cable television, phone service, etc.
  • Declare bankruptcy again for at least six years.

Again, Chapter 7 Bankruptcy is not for everyone. You will have to attend a hearing, in front of a Federal judge, and answer some standard questions. But the vast majority of court appearances are over within 10 minutes, and you will receive immediate relief from your debts. If you've been getting harassing phone calls, they will stop right away. Same with lawsuit threats. Your credit rating will instantly disappear, but you will be eligible for several credit repair programs.

Bankruptcy is not a perfect system of clearing debt from your life so that you can move on, but none are. (Well, maybe inheriting a few million dollars from some rich relative you didn't like all that well, or discovering a lost Van Gogh painting in your attic might be sorta perfect, but those cases tend to be really rare, too.) The important thing here is that bankruptcy does work for many people.

While virtually all creditors abhor the very idea that such soft-headed practices can legally exist in a society that reveres money as much as ours, most lawyers and personal financial consultants consider it just another legitimate money management program. But is it right for you?

The Chapter 13 alternative

As with Chapter 7, Chapter 13 Bankruptcy has its defenders and detractors, and neither is necessarily wrong.

Basically, under Chapter 13, a plan is developed to pay back all or part of your debts within a three to five-year time frame with revenues based on your future income. If this sounds familiar, it's because practically all of those private credit counseling services we see advertised on television are based on Chapter 13 guidelines—the main difference being that Chapter 13 is a federally administered program with serious legal ramifications and penalties for non-compliance, while participation in those privately run counseling services is strictly voluntary (and by the way, "non-profit" or not, all of them charge a pretty stiff participation fee).

In other words, a counseling service might sue you for non-payment if you can't or won't keep up your payments, but a Federal court can get downright nasty.

Conventional alternatives to bankruptcy

Though this article is primarily about eliminating personal debt through bankruptcy, so as to open up the possibility of realizing your self-reliant dream by starting fresh and free of debt, not everyone seeking the independent lifestyle will be comfortable with Chapter 7. A strong sense of self confidence, pride, and personal integrity often accompanies the desire to go it alone, and bankruptcy might seem like a humiliating way to stick someone else for some perceived personal failing. To those people, there are a variety of bankruptcy alternatives available.

  • Get a debt consolidation loan. If you have good credit, you can get a "bill payer" loan from your bank or lending institution, eliminating the various credit card interest rates and combining your debt into one monthly payment. Still, though, if you can't or won't control your credit card spending, the bank loan will just increase your monthly debt burden without giving back any positive results.
  • Contact your creditors about the possibility of just reducing your debt. It does work. Mention the word "bankruptcy," and most credit providers will immediately begin offering plans on how to reduce your debt, from temporarily eliminating the interest to writing off large chunks of the principle (as much as 50% in some cases). Again, this method only works for the long term if you keep a tight control over your credit spending.
  • Sell something, and use the money to pay your bills. It sounds outrageously obvious, but it's amazing how few people think of "repositioning" their assets in order to better satisfy their debt loads. For instance; got a 45k SUV in the garage? Even selling it for two-thirds of its worth, and buying a cheaper ride, should give you enough leftover change to reduce at least some of your debts.

Since most responsible adults are already familiar with most of the other conventional debt-reduction methods, such as getting a second job, enlisting the services of one of those credit counseling outfits, or "taking in wash" like my grandmother used to do during the Great Depression, this section won't labor the point. But no matter the method you choose in seeking non-windfall financial freedom, the importance of taking firmer control over your financial situation can't be overstated: not if you genuinely want to escape the life of a career wage slave.

In the end . . .

Let's simplify it.

Let's say you have a young family, a home mortgage, car payments, and a mountain of credit card debt. You want to raise your children away from the dangers, temptations, and distractions of the modern metropolitan setting, but you're too deep in debt to just pick up and head off into the countryside.

You've read this piece, and are wondering if personal bankruptcy is a realistic means of reaching your goals of self-sufficiency. Declaring Chapter 7 is as irreversible a choice as going back home was for the vast majority of the European immigrants of the past, and you desperately want to make the right decision.

Yes, the bankruptcy question will always come up on every credit application you ever fill out, and it legally demands an honest answer. And there will always be those who find the idea downright despicable for a variety of perfectly understandable personal reasons.

But declaring bankruptcy does not mean you'll become some kind of charity case in the eyes of the law. Those judges have seen it all, and they're not out to rob you of your dignity. They know that if you were capable of holding a job before your hearing, you'll be just as capable afterwards; but at least you'll have options. Do the homework—the research, the program comparisons, the serious thinking—it takes to make, and then live by, such a profound life-altering decision.

You'll find that you will probably be able to keep your house and at least one vehicle, and all of your personal possessions. But you won't be able to hang onto any "luxury" items you're still paying for, like a jet ski or that new $1200 pump shotgun.

If you go ahead and file, take the next couple of years to learn to live without credit while you're shopping around for the perfect homestead spot. Selling your house will give you the down payment money you need to buy your dream home, and you're still no worse off than you were before. In many ways, you're in a far stronger financial position.

Chapter 7 Bankruptcy can be one of the hardest decisions ever faced. But remember, if for some oddball reason you don't win the lottery after all, life is filled with just those kinds of choices, and always will be.

Your life will never be quite the same after filing for bankruptcy, but that's not necessarily a bad thing. Whether the change personal bankruptcy brings into your life is right or wrong for you in the long run is a question you will ultimately decide for yourself. Those hard decisions are an everyday part of living.

But then, isn't moving back to the land a life-altering decision in itself?




Read More by Don Chance

Read More Making/Saving Money Articles

 
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