How to Deal With Debt Before Filing for Bankruptcy

Three Parts:Dealing with Creditors/LendersManaging Your MoneyPreparing for Bankruptcy

If you are facing mounting debts, you may be considering filing for bankruptcy. Unfortunately, declaring bankruptcy also costs money, and you may need to buy some time to save up the money for a bankruptcy proceeding. In the meantime, you'll need to manage your finances and deal with the angry creditors hounding you for money. Learning how to deal with your debt before going to court can make your situation easier and help you prepare to file bankruptcy, or avoid it altogether.

Part 1
Dealing with Creditors/Lenders

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    Verify your debt. Before you attempt to pay back any money you owe, it's important that you verify your debt. Debt verification doesn't necessarily mean contesting the debt; it's simply a matter of verifying the information involved in the debt at hand. You have a legal right to verify your debt before making payments, as guaranteed by the federal Fair Debt Collection Practices Act.[1] Common reasons to verify your debt include:
    • confirming that a debt is legitimate
    • determining who you owe your debt to
    • verifying that a debt is yours (some debts that may be in your name could have been signed by a spouse or an adult relative)
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    Contact a credit counseling service. If you're facing debt problems, it's best to contact a non-profit credit counseling service. A representative can serve as a mediator between you and your creditor(s) to agree on a repayment plan that works for you.[2]
    • In addition to working out a repayment plan, credit counselors can also help you develop and stick to a budget.
    • Credit counselors can provide you with free educational brochures, and they often host free informative workshops on debt management.
    • The most trustworthy, reputable credit counseling services are non-profit organizations. They offer their services through offices in your community, online, and over the phone.
    • Not all non-profit credit counseling services are free, or even affordable. Many hide their fees or force you to make "voluntary" donations, so be sure to read the fine print before signing up.[3]
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    Consolidate your debt. If you owe a lot of money to various different lenders, you may be able to consolidate your debt.[4] Debt consolidation involves combining all of your debts into a single monthly payment, which is typically lower than the individual debts you would otherwise have owed.[5]
    • If you owe credit card debt, you may be able to consolidate your debt through a credit card company's zero-percent or low-interest balance transfer program. However, be aware that the zero-percent or low-interest offer typically lasts a limited time, after which your interest rate will rise.
    • Many banks, credit unions, and loan lenders also offer debt consolidation, allowing you to pay one simplified loan payment with a (typically) lower interest rate. However, just like credit card consolidation, many financial institutions' offer of lower interest rates are typically for a limited time, after which interest rates will rise.
    • Talk to a non-profit credit counselor or debt management service before consolidating your debt. A credit counselor/debt manager who works for a non-profit institution will help ensure that you're making the right decision and getting the best offer possible.
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    Consider restructuring/refinancing your mortgage. If you're in debt and you're still paying off your home, you may want to consider restructuring/refinancing your mortgage. This can help you save money, which can then be put towards paying off your debts or preparing for bankruptcy.[6]
    • One way to change your mortgage is by negotiating an agreement directly with your housing lender to develop a new payment plan.
    • Another option for changing your mortgage is to completely refinance your mortgage. This may require you to apply for a new loan with a lower, adjustable interest rate that spans a longer time period.
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    Try to negotiate a modified payment plan. A good way to reduce your debt is by working with your lenders/creditors to negotiate a modified payment plan. There's no guarantee that your creditor/lender will let you modify the payment plan, but often times they will.[7]
    • By negotiating with your creditors and/or lenders, you may be able to lower your monthly payments, defer at least one payment, waive late fees/penalties, or lower your interest rate.[8]
    • You might be able to negotiate on a lower repayment amount if you can come up with a lump sum to pay off the full negotiated amount in one or two installments.
    • Some creditors/lenders will be willing to accept a smaller cash amount if it guarantees that they will get some money rather than none.[9]
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    Know your rights. If you are in debt, there's a good chance that you're receiving calls from debt collectors. If this is happening, it's important to know what debt collectors can and can't legally do. There are a number of laws in place which protect your privacy, and if a debt collector violates those laws you can report that collector to the Federal Trade Commission by calling 877-382-4357.[10] Under current law, a debt collector is prohibited from doing any of the following:
    • calling you before 8:00 AM or after 9:00 PM local time
    • contacting you directly (at home or on your cell phone) after you've told the creditor that you've hired an attorney to represent you
    • calling you at work after you've told them not to
    • contacting your employer or coworkers and disclosing to them that you owe money to the creditor
    • communicating to anyone other than you or your spouse regarding your debt
    • engaging in deliberate, continuous harassment or abuse
    • having a representative who is not an attorney lie to you and say that he is one
    • threatening to have you arrested, imprisoned, or injured for failure to pay a debt[11]

Part 2
Managing Your Money

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    Develop and stick to a budget. No matter what stage of debt management and/or bankruptcy proceedings you may be in, it's important to stick to a budget to avoid going further into debt. This will require you to make an honest assessment of your current income and your spending needs.[12]
    • Write out a list for yourself that details all of your sources of income (including money you plan on borrowing, if applicable).
    • List your fixed expenses that are consistent from month to month (rent/mortgage payments, car payments, insurance payments, etc.).
    • Make a list of your varying expenses, which are not fixed from one month to the next. This may include groceries, gas or transit cards, clothing, and entertainment.
    • Make sure that you are not spending more money than you make in any given month. Anything that's left over should be set aside in a savings account so that you have some money to put towards your debts, legal fees, etc.
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    Cut back on spending. It may be difficult to cut back on spending, but it is an absolute necessity if you want to manage your debt. Distinguish the things you want from the things you need, and prioritize your spending so that you do not accrue any more debt than you already have.[13]
    • Take stock of the mandatory expenses, then prioritize the rest of your budget. Decide whether you absolutely need a new pair of jeans, for example, or if you can make do for a few more weeks with the clothing you have.
    • Cut out or postpone any expenditures that you and your family do not absolutely need. Clothing, alcohol, and entertainment (seeing a movie, buying new CDs, etc.) are all expenditures that can be delayed or sacrificed until your finances improve.
    • Some necessities that you'll need to continue spending on include food, rent, utilities, bills, and a means of traveling to/from work or school.
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    Liquidate your property. If you're in debt and facing bankruptcy, you may need to sell your property. If you file for Chapter 7 bankruptcy, you won't have to set up a repayment plan. Instead, your property will be taken over by a court-appointed trustee, who will then sell or liquidate any or all of your possessions and use the proceeds to settle your debt.[14] If you're planning to file for Chapter 7 bankruptcy, you can avoid the stress of watching all of your possessions get sold by deciding what to sell on your own.[15]
    • Try selling antiques, valuables, and anything you can part with through Craigslist, eBay, or a local public auction.
    • If you have an outstanding auto loan, your car may be repossessed and auctioned or sold, leaving you careless and in debt for the towing and storage costs. If this is a risk, you may be better off selling your car and using the money to pay off your auto loan debt.[16]
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    Consider borrowing money from family/friends. This is a tricky subject, as many people in debt may be fearful of asking friends or loved ones for money. If you have a friend, parent, or close relative who has a lot of money, though, they may be able to help you get by until you sort things out with your creditors/lenders.[17]
    • If you do decide to borrow money from a friend or relative, make a repayment plan up front and follow through on your promise to repay the money you borrow. The last thing you want is for bad blood to develop over unpaid loans.
    • Make a budget so you don't misuse the money that's loaned to you, and if you plan on filing for bankruptcy make sure you set aside enough money to pay for any legal fees and court filing costs you may need to pay.

Part 3
Preparing for Bankruptcy

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    Assess the situation. If your debt is significant, you may be considering filing for bankruptcy. For some people, this is certainly the best choice. However, you should exhaust all other alternatives before attempting to file for bankruptcy.[18]
    • Filing for bankruptcy can have serious, long-term repercussions. Your credit score will be affected, and you may have a hard time opening a bank account or taking out a loan.
    • Talk to a credit counselor before making the decision to file for bankruptcy. They may be able to help you manage your debt and avoid having to declare bankruptcy.
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    Consider hiring an attorney. If you've assessed your options and have no choice but to file for bankruptcy, you should seriously consider retaining an attorney to help you with the process. You have the right to represent yourself in court (unless your corporation is filing for bankruptcy), but having a lawyer can help ensure that you have access to pressing legal advice and are able to follow all legal requirements that are part of the bankruptcy proceedings.[19]
    • Without an attorney, you could make a critical error in your filing and representation that could lead to your case being dismissed in court. This will add additional (and fruitless) court and filing fees to your already unmanageable debt.
    • Look for attorneys who work pro bono ("for the public good"). Reach out to your local legal-aid society, or search online for the American Bankruptcy Institute's Pro Bono Locator to find a free bankruptcy attorney in your area.[20]
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    Know what you'll need to pay. If you do move forward with bankruptcy proceedings, you should know what to expect in terms of payments and filing fees. There may be some variance, depending on where you reside, but in general you can expect to pay the following fees:
    • attorney fees can cost an average of $1,078[21]
    • copies of legal documents will cost you $0.50 per page
    • document certification will cost $11
    • audio reproductions from a court proceeding will cost you $30
    • filing an amendment to your schedule of creditors or list of creditors will cost $30
    • searching through bankruptcy court records will cost you $30 for each name or item you search for
    • filing a complaint will cost $350
    • filing additional documents (unrelated to your pending case) will cost $46
    • filing a petition will cost either $75 (for Chapter 7, 12, or 13) or $550 (for Chapter 9, 11, or 15)
    • filing a motion to divide a joint case for Chapter 7, 12, or 13 will cost $75
    • filing a motion to divide a joint case under Chapter 11 will cost you $550
    • filing a motion to reopen a case will cost anywhere from $200 to $1167, depending on which chapter bankruptcy you are filing for
    • returned/denied payments due to insufficient funds will cost you a $53 fee
    • additional motions can cost upwards of $176 each to file[22]
    • depending on which Chapter you file for, you could easily end up paying over $4,000

Sources and Citations

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Categories: Bankruptcy