Thankfully, if you determine that bankruptcy is the best option available to resolve your financial difficulties, you should not need much money to begin the process.
Bankruptcy on a tight budget
Many consumer bankruptcy attorneys will provide prospective clients free consultations; a qualified attorney should be able to help you decide if bankruptcy is a viable option in your circumstances, and what you can do given you limited funds. If you decide to retain an attorney, your attorney may allow you to pay his or her fees in installments, allowing you to begin your bankruptcy case without having all of the money needed to pay your attorney.
In addition, the federal bankruptcy courts provide various options to individuals who cannot afford to pay their court filing fees needed to commence a bankruptcy case. For example, if your income is below a certain amount set by the court, the court may waive your filing fee altogether. Even if your income does not qualify you for a fee waiver, the court may allow you to pay your fee in installments rather than as a single lump sum, which is much easier for many filers who are living paycheck to paycheck. Discuss these options with your attorney, as he or she should be able to tell you what relief is available to you given your finances.
Since you are considering filing bankruptcy, I will briefly review the two types of bankruptcy most commonly used by consumers -- Chapter 7 and Chapter 13.
Chapter 7 bankruptcy
In a Chapter 7 bankruptcy, also called a liquidation bankruptcy, a bankruptcy trustee will examine your assets, and if you have any assets which are not exempt, sell those non-exempt assets to repay your creditors. Once your non-exempt assets have been sold to pay your creditors, all remaining unsecured debts will be discharged by the bankruptcy court.
Many people who file for Chapter 7 protection are able to keep all of their property because they have no non-exempt property. Each state has its own schedule of exempt assets, so you should consult with a qualified bankruptcy attorney in your state to find out if Chapter 7 is a workable solution for your situation. An attorney will also be able to tell you if you qualify to file Chapter 7 under the new guidelines enacted by Congress in 2005.
Chapter 13 bankruptcy
A Chapter 13 bankruptcy, also called a "wage-earnerÂ’s bankruptcy," allows you to propose a plan to repay creditors over time -- usually five years. Your monthly payment amount will be based on your monthly disposable income as defined by the bankruptcy code. After you have made payments to your creditors for five years, any remaining unsecured debts will be discharged. Chapter 13 is commonly used by debtors whose assets exceed the exemptions offered by state law. It is also used by many consumer debtors who do not qualify for Chapter 7 relief under the means test, which went into effect in 2005 with the Bankruptcy Reform Act.
In addition to consulting with an attorney about bankruptcy, you may wish to consider some bankruptcy alternatives which may help improve your financial outlook.
One option to consider is a Consumer Credit Counseling Service, or CCCS. CCCS companies offer numerous services, such as financial counseling and budget planning, as well as Debt Management Plans (DMPs). In a DMP, the CCCS would arrange a new payment amount with each of your creditors, usually based on a reduced interest rate. You would then make a single monthly payment to the CCCS which would distribute the funds to your creditors, based on the new payment amounts. There are several drawbacks to CCCS, though. First, depending on your creditors, it may not be able to reduce your monthly payments enough to improve your financial situation. Second, it may have a negative impact on your ability to obtain a loan, so you may not wish to enter into a DMP if you anticipate any large purchases, such as home or an auto, in the near future. Third, the average DMP takes around five years to pay off your debts, so you must be willing and able to commit to a long-term repayment plan.
You may also want to consider the services offered by debt settlement firms. Rather than making monthly payments to your creditors, these programs negotiate lump sum settlements with your creditors, frequently reducing your debts by 50% to 60% of your principal balances. These programs usually take 2-3 years to complete, so this is a good option for many people to rid themselves of debt in a relatively speedy manner. In many cases they can also reduce your monthly payment toward your debt. There is one major drawback to debt settlement programs, though -- they will significantly damage your credit while in the program and for at least a year or two after. However, if you are currently unable to afford to pay your creditors and considering bankruptcy, the hit to your credit may be worth the benefit of ridding yourself of credit card debt.
These are just a few of your alternatives to bankruptcy. See What Are My Debt Consolidation Options? for more.
More information on bankruptcy
The Administrative Office of the U.S. Courts offers an excellent Web site covering the United States Bankruptcy Courts, and offers overviews of Chapter 7 and Chapter 13. You may also wish to review the IRS document "Declaring Bankruptcy" to understand any tax implications to filing bankruptcy.
Finally, I encourage you to read more about bankruptcy at the Bills.com Bankruptcy information page.
I hope this information helps you Find. Learn. Save.