Credit Repair Blog Series: Part 3 – Reducing Your Debts

Bankruptcy AttorneysReducing Your Debts

This third blog of the Credit Repair Blog Series will focus on reducing your debts. Specifically, the attorneys at Orange County bankruptcy attorneys will explore how to use bankruptcy to reduce your debts so that your repayment ability is manageable and realistic.

In order to repay your debt and sustain yourself, you generally have to have an increase in income. Otherwise, debt begets debt, and interests and late fees will just pile on top of what you already owe.

Bankruptcy is an option if you find yourself falling further and further behind on repaying your mortgage, car payment, credit cards, or medical bills. Bankruptcy is a powerful tool to get your income and debt into balance. Furthermore, bankruptcy can actually end up helping your credit rather than damaging it. If you already have debts going into collections, bankruptcy can help you begin rebuilding your credit as soon as you receive a discharge.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy allows you to wipe out most consumer debts, from credit cards to medical bills. By filing this type of bankruptcy, you can simply walk away from most of your bills if you receive a discharge. This will basically allow you to restart your financial life and save your income.

When you file for bankruptcy, an “automatic stay” is imposed by the court that prevents your creditors from trying to collect from you.  This stops actions such as wage garnishments, lawsuits, emptying your bank accounts, or repossession of your home or cars.  At the conclusion of your case, most of your debts are discharged, or wiped out by the court. This would include any debts you have at the date of filing. Debts incurred thereafter are not dischargeable.

Once you receive a discharge, you no longer owe the debt, interest or fees. You will also stop receiving harassing phone calls from collection agencies. Most importantly, it allows you a fresh financial restart.

Chapter 13 Bankruptcy

As stated earlier, being able to repay your debts generally requires that you receive an increase in income.  But even with an increase in income, you would still have to deal with mounting interests and late fees on your debts.  One way to stop the interests and late fees from being tacked onto your accounts is to file a Chapter 13 bankruptcy.  A Chapter 13 bankruptcy lumps all your debts together and allows you to repay it back based on a court supervised repayment plan, while at the same time preventing any interests and late fees from being added to your debt total.

Another big advantage of filing a Chapter 13 bankruptcy is that it allows you to catch up on all your missed mortgage or car payments to get back on track with the original loan, without the threat of foreclosure or repossession.  Many people who own a home but are late on their mortgage payments file a Chapter 13 to save their home.

If for some reason you cannot complete a Chapter 13 repayment plan, which typically lasts from three to five years, the bankruptcy court has the authority to change your plan.  If it becomes clear to the bankruptcy court that you cannot possibly complete the plan because of circumstances beyond your control, the bankruptcy court might even let you discharge your debts on the basis of hardship.  However, if you cannot obtain a hardship discharge, you can always convert your Chapter 13 to a Chapter 7, or dismiss your Chapter 13 case altogether.  A dismissal would still leave you in a better position, since you would owe less for the payments you made.

Bankruptcy and Credit Repair

We have now learned how bankruptcy can be a powerful tool in eliminating or reducing most of your debts. It gives you the fresh financial restart you need.  But how does bankruptcy impact your credit score?  According to the Fair Isaac Corporation (FICO), “someone who had spotless credit and a very high FICO score could expect a huge drop in their score.  On the other hand, someone with many negative items already listed on their credit report might only see a modest drop in their score.”  Therefore, depending on your situation, the drop might be less significant than you think.

If you are already behind on your debt, then you will likely not experience a huge drop in your FICO score.  Ironically, a bankruptcy may help you start building good credit sooner than if you don’t file for bankruptcy and continue to struggle with more debt than you can pay.  In fact, eliminating or reducing debts through bankruptcy will help you meet the two most important goals for a good credit score:

1) making your payments on time, and

2) not using most of your available credit.

For those individuals who are drowning in debt, bankruptcy may be a better option for reducing your debts than you think.