Today’s post is a little more about our history and what we learned from our Bankruptcy research.
I wrote before about how a conversation about our finances led my Mom to suggest that we needed to file for bankruptcy. She told us “stop paying your credit cards, meet with a lawyer and file the paperwork this week.” So the next Monday, we started researching the process and we found out the following:
- Before you can file for individual bankruptcy, you need to attend a pre-bankruptcy counseling session (either in person on online) to obtain a Bankruptcy Counseling Certificate.
- Chapter 7 takes your assets and distributes them to your creditors and the rest of debt (except student loans and a few other types of debt) are discharged. Chapter 13 develops a payment plan so your creditors get as much as they can for 5 years. (These explanations are over-simplified – I’ll post some resources that help with providing more detail later).
- After you file, your creditors can no longer call you, until the Meeting of the Creditors where you have to face your creditors.
- Both filings stay on your record for 7 years.
- If you are married, only one spouse *can* file, but both incomes are taken into account, which adds to #6.
- It’s really difficult to qualify for Chapter 7.
The bulk of the debt is only in my husband’s name ($42,000+) and filing might cause some complications with my job, so we decided that my husband would contact his Employee Assistance Program and get a referral for a Bankruptcy lawyer. He was connected with one and the lawyer did a phone consult with my husband. The lawyer was very terse and said, “you can’t file, you make too much money.” This seemed to conflict with a lot of the research that we had done, so we contacted the EAP again and my husband got a meeting with a new lawyer – one who worked at a Bankruptcy practice. He took all of our financial records with him and at the end of the meeting it was determined:
- We could file for Chapter 13.
- The payments would take 5 years.
- The firm would require $2,400 to file the paperwork.
- Our credit lines would be closed.
- Our standard of living would be very, very low for 5 years.
Both my husband and I felt a little defeated – it had already been a really touch 18 months, and we felt so hopeless. We had really hoped that we would be able to file for Chapter 7, but even though our debt (over $60,000) was more than our annual take home (under $60,000), we “made too much money” to have any of our debt discharged.
So, as our creditors were calling every day (seriously, EVERY day), I asked my husband to try and cut a deal (settlement) with them. I suggested that he tell them that we were about to file for bankruptcy and did they want to work something out with us so that neither party had to go through the system – I told him we should ask them to drop the principal and interest rate. Here is what happened:
- MBNA – dropped the interest rate to 4.25% (from 19.95%) and put us on monthly payments of $370/month, which lowered our monthly payments by almost $200.
- Citibank – dropped the interest rate to 9.9% (from 32.24%) and put us on monthly payments for $319/month, which lowered them by $200-300
- Direct Merchants (they weren’t as friendly, but they cut us a good deal) – they cut our principal by 25% and took the interest rate to 0% – *however* we had to pay the balance monthly within 6 months – those payments are the $1,600+ payments (only 2 left as of this writing).
The “hitch” for all of this: (1) the cards/lines of credit are closed, (2) my husband cannot apply for any credit while paying these off or the terms will revert to the previous agreement – this is for 5 years, (3) if we miss a payment, all the terms will revert.
But all in all, I’m actually glad that we went through with this process instead of going through the bankruptcy filing. Sure, there would have been more protection and it would be nice to have it a little more “out of our hands,” but I really think that this allows us to push even harder to reduce our debt as our circumstances change. And even though the payment plans are 5 years, we’re still committed to being done with this process in 3 years, 3 months.