Dodge costly bankruptcy bullet

Wednesday, June 16, 2010

From CUNA

McLEAN, Va. (6/14/10)--Despite a growing number of student loan defaults, home foreclosures, and credit card loan defaults, only a fraction of debtors in serious financial distress are filing for bankruptcy--often because they simply cannot afford to file (USA Today June 9).

The bankruptcy laws changed in 2005 to curb abuse. Now it's harder and more expensive to file Chapter 7 bankruptcy, which erases most debts. Higher attorney and filing fees have resulted in many debtors postponing a bankruptcy filing until they receive a windfall such as a tax refund, but experts fear that a delay could lead to even more financial problems for the individual or family.

A bankruptcy cannot wipe out student loans unless you can show undue hardship. It cannot prevent a secured creditor from repossessing property. And it cannot eliminate child support or alimony obligations, or free you from most tax debts. Even more critical: Once you file, the bankruptcy stain stays on your credit report for 10 years, and there is no way to legally remove the filing from your report (Bankrate.com June 8).

If you're struggling financially, consider these tips to dig out and dodge the bankruptcy bullet:

• Talk to creditors. The sooner, the better, particularly if you think you soon may fall behind on payments. Making a good faith effort early on could be the most important move you make to protect your credit during tough times.
  
  
• Consider refinancing your home. With record-low interest rates, a lower monthly payment could give you a much-needed financial cushion and allow you to pay down other debt. Ask the credit union to run the numbers, based on your credit score. Remember: Avoiding bankruptcy protects your credit score.
  
  
• Spend smart. Find hobbies that don't require opening your wallet. Identify spending leaks. Ask family members to identify less-costly alternatives.
  
  
• Don't add new debt. Keep balances low, and don't sign up for any more loans or credit cards. Get off prescreened credit card and insurance solicitation lists at optoutprescreen.com or call 888-5opt-out.
  
  
• Steer clear of credit repair scams. If you see a promise to "eliminate bad credit" or "erase negative information," run the other way. It's a scam. Visit fraud.org for more warnings about credit repair scams.
  
  
• Get help. Ask the credit union about consolidating credit card debt and how to connect with local credit counseling assistance. Visit nfcc.org or call 800-388-2227 for the consumer credit counseling service office nearest you.