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Can I Just Ignore My Debt and It Will Go Away?

So what happens if you are too far in debt and you just ignore it? Doing nothing about your debt is an option only if you like having nothing. If you have assets, your creditors can sue you and take them. Judgments against you last for 10 years and can be renewed for two additional 10-year periods. Simply ignoring the debt will only make matters worse. So what are your options?

Given the current state of the economy, more and more businesses are popping up to offer debt relief for consumers. These might include debt settlement, credit repair, credit counseling or filing bankruptcy. No matter which option you choose for your situation, be careful to investigate the business promising help to make sure they can do what they say they will do. (For more about credit repair companies, see my library article titled "Be Aware of Credit Repair")

In today’s world, filing bankruptcy is not necessarily a last resort. Most people who file got in trouble because of a single event such as divorce, a job loss or medical bills, not because of being irresponsible. Most people have no alternative and have no resources to pay off their debts.

Bankruptcy may be your best option if it will take more than five years to pay off your unsecured debt, such as credit cards and medical bills. Bankruptcy will not get rid of your secured debt like a mortgage or car loans. It also won't eliminate most student loans, child support, alimony or recent taxes.

6 tips for a smoother bankruptcy filing

If you decide that bankruptcy is necessary for you to receive the fresh start you deserve, take these steps:

• Hire a reputable attorney. The new bankruptcy law increased the amount and complexity of paperwork, including a "means test," needed to file. Beware of bankruptcy mills that charge high fees for botched service. You can request my free consumer guide “7 Critical Mistakes To Avoid The Dismissal of Your Bankruptcy Case” which will walk you through the questions you need to ask any bankruptcy attorney you interview.
• You must get a credit counseling certificate from an approved agency within 180 days of filing.
• Gather as many documents as you can because when you meet with your lawyer, you will need pay stubs, tax returns and letters from collection agencies, judgments, etc.
• Don't use your credit cards anymore. Bankruptcy courts can consider that fraud and you could end up having to pay what you charged once you figured out you were insolvent.
• Depositing your money with the banks that issued your credit cards can be dangerous. In some cases, banks have the right to seize funds on deposit if a credit card account is delinquent.

For most people, there are two types of personal bankruptcy:

• Chapter 7, or liquidation, requires the sale of nonexempt assets to reduce unsecured debt. The remainder of your unsecured debt will be discharged. What's considered exempt depends on the state you live in, but most people are allowed to keep much more than they thought they would. You are allowed to keep your retirement accounts, and most people retain possession of a car and their home if they keep making payments on them. A good bankruptcy attorney will have as his main priority protecting your property from being sold in a Chapter 7 bankruptcy case.

• If your income exceeds the median for your family size in your state and the means test says it's sufficient to make payments on your debt, you can still file for bankruptcy protection under Chapter 13 instead. Under Chapter 13, or debt reorganization, you keep your property and agree to a three to five-year repayment plan for some of your debt. If you follow the plan, the remainder of your unsecured debt will be eliminated. Chapter 13 is generally the better option if you've fallen behind on house payments because the plan allows you to catch up those payments and avoid foreclosure, repossession and it stops wage garnishments.

When you file, in most cases an "automatic stay" stops all collection attempts. If filing a Chapter 7, you need to keep making payments on secured debts you intend to keep or face repossession or foreclosure. In Chapter 13 cases, all of your debts, with some very limited exceptions, are paid inside your Chapter 13 plan, so you would not keep making payments on them after filing. In either case, you'll attend a creditors meeting (creditors rarely attend), where a trustee will review your case. In a Chapter 7 proceeding, the Trustee’s job is to look for assets you have that he can sell and repay your creditors. In a Chapter 13, the Trustee is making sure you use your best efforts to repay your creditors over the term of the plan. You'll also be required to complete a financial management course, which is the second part of the new course requirement under the new law (BAPCPA).

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