How Bankruptcy Can Help You Pay Debts

Published Monday, January 25, 2010 @ 6:57 pm

Ugh. Debt. These days most Americans are sick of hearing the d-word. And who can blame us? Americans are in more debt now than ever before. Avoiding debt seems impossible…there are so many things you can’t even do without credit cards or loans that we now take debt as a matter of course. Despite our negative feelings about debt, Americans want to repay what we owe. In fact, this noble instinct is what keeps some people from filing for bankruptcy when they desperately need to do just that. Not only are people afraid of having a negative impact on their credit scores (which in fact may already be in the basement), they also feel that the right thing to do is pay back debt.

When it is possible, paying back debt is the right thing to do, no doubt about it, but most people who declare bankruptcy don’t end up in a bad situation because they made negligent mistakes or don’t feel like paying; instead, dealing with the curve-balls life throws at us can prevent us from meeting obligations. By the time people opt to declare bankruptcy, they are not unwilling to pay back debt they simply can’t. The thing to remember is that creditors know that and take these factors into account. This is the reason creditors charge higher interest rates when they extend unsecured credit. If bankruptcy is the right decision, you shouldn’t allow misgivings about not paying certain kinds of debts hold you back.

What many people don’t even consider is that declaring bankruptcy can actually help you pay back debts. Consider this example: Say you are considerably behind on payments that are secured by your home or your car. In such a situation, filing for Chapter 13 bankruptcy can allow you to reach a compromise between what is feasible and what your creditors expect. In a Chapter 13 bankruptcy, a repayment plan could save your home from foreclosure by allowing you to catch up on back payments. Similarly, a Chapter 13 repayment plan can allow you to catch up on back payments for your car, helping you to avoid losing your vehicle to repossession. In both situations, the creditor is receiving payments for the credit they have extended, and you are working with a plan you can actually meet. This also applies to debts that you would not be able to discharge in a bankruptcy, such as child support payments and back taxes owed to the IRS. A Chapter 13 plan can help you make up for missed payments in the past while easing the pressure of being hassled and worried about never catching up. Eventually, with a good Chapter 13 plan, you are more likely to succeed in getting current on all your required payments.

A strategically timed bankruptcy can also help you in those situations where you may be able to pay off all your debts by selling assets, but you simply need more time. With aggressive creditors hassling you constantly, you may end up selling assets for less than they are worth, just to do so more quickly or to avoid penalties. This could land you with debts still to be paid and no assets to boot. A typical example is if your home is foreclosed on. Your home is not likely to sell for what it is actually worth if it goes through foreclosure. This means that you will no longer owe the mortgage company, but you will also lose the value in your home, if any, that exceeded the value of the mortgage. By declaring bankruptcy and forestalling foreclosure, you reap the actual benefit of your investment and potentially pay back everyone you owe.

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