| Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
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Gary,
My husband and I got married quite young, made some unwise financial
decisions and ended up in debt (some credit card, some personal
loans) with a grand total of $24,000. My husband has worked very
hard over the years, sometimes 3 jobs at a time, trying to make ends
meet. We have gone through credit counseling and a consumer
proposal. We are the parents of 3 young children and have had to
choose between paying our bills, so we wouldn't go bankrupt, or buying
groceries.
After many years of trying, we feel that we have no other
choice but to file for bankruptcy. We honestly would like to do
anything else, but we feel that this is our only alternative.
Exhausted in Sudbury
According to the U.S. Federal
Reserve, the typical filer has about 1.5 times their annual salary
in short-term, high interest debts (like credit cards and personal
loans). About 2/3 of the those filing say that they have lost a job
and about 1/2 have faced a serious health problem.
Canadian
and U.S. bankruptcy law are fairly similar. There's a national law
that authorizes bankruptcy and then state or provincial law
determines things like what property you can keep through a
bankruptcy.
Basically, a bankruptcy discharges
certain debts and says that the creditor is no longer entitled to
repayment. The purpose is to allow the debtor to get a fresh start
and creditors to get an equitable distribution of any assets.
Just because debts are eliminated
doesn't mean that the slate is wiped completely clean. Debts
discharged in bankruptcy will appear in your credit history. In
Canada they will remain for 6 years. In the U.S. the bankruptcy will
appear for 10 years.
There are also some debts that a
bankruptcy won't eliminate. In both the U.S. and Canada back taxes,
alimony, child support, and student loans are not discharged.
Canadian student loans can be discharged 10 years after graduation.
OK, now let's look at Exhausted's
question. When is it time to throw in the towel and file for
bankruptcy?
Exhausted is correct. Bankruptcy
should only be used when the other alternatives have failed. When
minimum monthly bills are more than the family can pay, the first
step is to contact the creditors and ask for a payment plan. If that
doesn't provide enough breathing room, it's time to contact a
qualified credit counseling agency. They can negotiate the interest
rates down.
Neither of those steps will reduce
the amount owed. It will only cut interest rates and create a more
livable payment plan.
Sometimes, that's not enough. If a
credit counselor can't work out a plan to pay off your debts in less
than five years, then it's time to consider something more drastic.
In Canada a debtor can file a
'consumer proposal'. It brings in a trustee and asks for a reduction
of the amount owed and/or the interest rates charged. The debtor
makes payments per the plan. At the end of the plan remaining debts
are discharged. Creditors have the right to reject the proposal.
In the U.S. a chapter 13 bankruptcy
filing serves a similar function. It's meant for people with a
regular source of income and enables them to keep some valuable
property (such as a house) while putting together a payment plan
that usually runs 3 to 5 years. Payments must be completed under the
plan before the remaining debts are discharged.
If Exhausted's income is only enough
to cover living expenses without repaying debts, a bankruptcy filing
in Canada or a chapter 7 bankruptcy in the U.S could be appropriate.
In either country, if there's income available for debts, it's the
court's responsibility to redirect the debtor to a consumer proposal
or chapter 13 filing.
In a Canadian bankruptcy or U.S.
chapter 7 filing, the court appoints a trustee. The trustee collects
the debtor's assets, sells them and then pays the money out to the
creditors. Some items are exempted from the sale. After the proceeds
are distributed to creditors the remaining debts are discharged.
There are other things to consider
when deciding whether to file for bankruptcy. Bankruptcies are
public records. In the past you could be pretty sure that no one
would find out unless you told them. But, in today's interconnected
world that's not so sure.
It's also possible that the debtor
has some asset that they could lose during bankruptcy. For instance
retirement accounts or valuable family heirlooms could be
liquidated.
In the states, there will be filing
fees, typically about $200. Your lawyer will get about $1,000 in
fees, although you can keep that down by having current statements
on all your income and debts. Many will offer one free consultation.
Canadian fees are government regulated and typically are paid out of
the assets available to creditors.
Exhausted should also pay attention
to proposed bankruptcy legislation in both the U.S. and Canada that
would make it harder to declare bankruptcy.
Finally, there is one reason for
Exhausted to smile despite the challenge her family has faced. There
was a time in old England where a person unable to pay their debts
could get the death penalty! Fortunately that law doesn't apply
today and no one is adding it to any proposed legislation.
--End--
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