How does personal bankrupcy work?

Factual Questions
1

I’m thinking about declaring personal bankrupcy since I owe the IRS, my credit card, my sister and the parking tag office at total of about $6000 and I can’t pay the interest any more.

How much does it cost to declare bankrupcy? I mean, including the lawyer and stuff?

I know bankrupcy makes it harder to buy a house … does it also make it harder to rent an apartment? I’m thinking about moving to a cheaper place and I was hoping it wouldn’t have to be my parents’ house. My current place is $475 a month so there probably isn’t really any place cheaper, but I thought I should know anyway.

Do potential employers want to know this stuff?

How long does it take for the creditors to forgive you? I mean, if by some miracle I could buy a house in thirty years, would they still hold it against me?

Anyway, I don’t have any firm plans yet, I’m just looking at my options, and according to Straight Dope, selling body parts is right out.

2

There are two kinds of personal bankruptcy, Chapter 7 and Chapter 13. In one of them you work out a repayment plan to pay your creditors – may not be the entire amount, but some percentage – and in the other you wipe out all your debts. There are advantages and disadvantages to everyone.

I would STRONGLY URGE you not to file bankruptcy at this point in your life. It ain’t worth it for the amount you owe, which appears to be something under $10,000. Bankruptcy stays on your credit report for 10 years.

Talk to a credit counseling service, look in the yellow pages. Call the IRS and see if you can work out an Offer in Compromise. Call the credit card company and ask for the hardship department (not the credit department), and see if they will work with you on negotiating a lower interest rate (be prepared for them to close the card, though). Get a second job delivering pizzas and work on paying of the debt. Move in with your folks, if they’ll let you, and put all the money you save toward your debts.

Many employers will indeed run a credit check on you before making a job offer, especially if it is a job where you will have access to the company’s funds, or to funds belonging to company clients, or if the position requires you to have a company credit card. Also, insurance companies are beginning to run credit checks on potential insureds; there are studies which suggest that 40 per cent of claims come from the 10 per cent of people with the lowest credit rating.

Depending the dependings, filing for bankruptcy will cost you, out of pocket, $500 to $1500 (we’re not even discussing what it will cost you in terms of your bad credit). If you decide to do it, and choose a lawyer, make sure you select one whose primary caseload is bankruptcy-related.

But don’t do it until it truly is the last resort of last resorts.

-Melin, Esq.

3

Methinks we’re not getting the whole story here, Boris. The interest on $6000, even at 21%, works out to $105/month. The only other expense you mention is rent of $475/month. That is an annual debt of $6960/year. I assume that since you are paying rent that you also have a job. Unless you are earning less than $10,000/year, or have other debts that you did not list, then it’s not a money problem, but a money management problem. Bankruptcy does not cure bad money management.

The only thing Melin left out of her post pertained to renting an apartment. Yes, bankruptcy will make it more difficult to rent. And, IIRC, bankruptcy does not wipe out debts to the IRS.

The overwhelming majority of people have more than the average (mean) number of legs. – E. Grebenik

4

Bankruptcy (and poor credit generally) will now also hurt your chances of getting and up your risk profile when purchasing auto insurance. The companies have done studies relating credit problems to propensity to file a claim, and they have worked it into their pricing tables.

Listen to Melin.

Livin’ on Tums, Vitamin E and Rogaine

5

Well, yeah, I guess I didn’t really give you the whole story. Yes, I am a terrible money manager. I have a full time job earning $10.50 an hour, I think, before taxes. After taxes it seems like it’s about 25 cents an hour, but I’m not in the 97.5% tax bracket so that can’t be true.

As to the $105 a month in interest, that does seem pretty low. I suppose it’s not the interest that’s killing me, as much as the fees, since there is a $25 fee for being over my credit limit, and my credit card company charges me to report me to the credit bureau (at least I think that’s what that Sentinel charge is).

I’m not really settled on the bankrupcy idea, I’m just in a panic right now because my paycheck is late (although they say it’s not late, it’s just been early every other time they’ve paid me), and I just got this weird $2000 charge from the IRS that I don’t understand, and I can’t really afford to take it to a tax accountant.

A lot of my taxes are from capital gains on a trust fund that I do not have access to. The fund pays its own taxes, in theory, but it never seems to work that way in practice, since it costs me a bunch of extra money to pay accountants to figure it out for me.

If you hadn’t already guessed, I’m one of those stupid overgrown kids who inherited a lot of money that everyone despises (despises the kids, not the money). I heard about all the college kids on NPR that run up thousands of dollars in debts … I’m like that except a lot older.

I guess I make about $15,000 a year not counting all the capital gains I don’t have access to until I’m fifty. The other part of the story I didn’t mention was my car, which costs $225 a month plus a little over $100 a month in insurance, plus all the fees I get for paying late for aforementioned reasons of appalling money management. So I should probably try to get out of my five-year automobile lease … I don’t know how hard that is going to be because frankly I’ve been too scared to ask.

The last part of the story is I owe about $2000 in medical bills, but my doctor is kind enough not to nail me for interest on those. My job doesn’t have medical insurancethankyousenatordole and I’m waaaay too rich to get public assistance. There is a plate in my leg from getting run over by a car, which has been irritating my leg increasingly in the past few months, but I don’t anticipate having enough money to have the plate removed any time soon, like, say, three or four hundred years from now.

But your suggestions about talking to the IRS and credit card’s hardship department sound like they are worth looking into.

6

A friend of mine went to credit counseling and the counselor got all her debtors to stop charging interest. I don’t know if you can get a deal this good, but a reduction beats 21%. Your debtors would rather help you out than see you go bankrupt; if you declare bankruptcy they’ll never see their money again, or at least nowhere near all of it.

“Happiness is nonetheless true happiness because it must come to an end, nor do thought and love lose their value because they are not everlasting.”

  • Bertrand Russell
7

Yes, yes, yes, yes call Consumer Credit Counseling Service (CCCS). There is a local office near you. Try the phone book or use the web. Most of the people who work there have been through what you’re going through. They can give you information on all the options (including bankruptcy). And they will deal with your creditors and get you as good a deal from them as you can get. For instance, they can probably eliminate that monthly “over-limit” fee and get you a reasonable (< 10%) rate on your credit card. (In return you’ve got to stop using the card.)

Their services are free but you are welcome to make a donation. They will listen to you and deal with all the hassles.

“The inability of science to grasp Quality, as an object of enquiry, makes it impossible for science to provide a scale of values.”
Robert Pirsig

8

First of all you aren’t THAT much in debt. At 10.50/hr you make $21,840 a year. According to current standards you should be able to pay up to 35% of your income in rent. (that is over 600/month - currently at $475.00 you are paying about 27% of your annual income for rent.

My suggestion is get a part time job. If that fails try getting a job that pays more.

If that fails go to your creditors. It isn’t the debt so much, it is the interest that is killing you. Go to each one and state plainly you cannot pay anymore and you are about to declare bankruptcy. 9 out of 10 times they will work with you. They will put you on a payment plan. A lot will stop the interest.

The key to making this work is you have to convince them you WILL declare bankruptcy and they’ll get nothing. They know it is better to get something than nothing.

And failing all that if you have nothing don’t pay. They can’t put you in jail for being a deadbeat. Of course they could attach your wage but that is unlikely. So unless you have a house or a lot of money you really got nothing to lose.

Yes you will get bad credit, but if you need a credit card you can get a securd one. And as for a house or car that is your collateral. Granted the interest is higher but you can pay it off quicker and reduce that cost.

But again all of these will get you out of trouble but if you don’t change your ways, you’ll soon be back in hot water.

9

Been there! Done Both!
Call CCC. They are really nice- just get ALL of your bills together- every single one of them. They will contact your creditors and explain that you are trying to catch up and make repayments. Most credit cards will stop charging interest. You will make ONE monthly payment to CCC and they will pay off your bills. Do it right away, you’ll feel so much better.
Since I’ve done both, drop me an e-mail if you want to talk about this more. suzette100@yahoo.com

Some mornings it just doesn’t seem worth it to gnaw through the leather straps.
http://www.angelfire.com/ny3/zettecity/index.html

10

I agree that credit counseling is your best bet. You’ll lose out on your current credit cards, but you’ll learn how to budget your money wisely. Perhaps they can even give you advice about that trust you’re paying taxes on but not getting access to…who knows?

One thing I recently heard is to NEVER accept a time-payment plan with the IRS. It seems they just keep tacking on interest and penalties and the tax debt never gets paid off. The consumer credit folks can give you more on this as well.

Don’t dread it…do it. You’ll feel so much better for getting the burden of dread off your shoulders.

“There will always be somebody who’s never read a book who’ll know twice what you know.” - D.Duchovny

11

Am I detecting a pattern here? You guys are great. I’ll give the credit counselling people a call. I’d actually heard of them, but for some reason I never even fathomed that they had anything to do with my situation. It sounds like they are right for what I need though.

Thanx all

12

Besides the fact that bankruptcy doen’t affect what you owe to the IRS. They don’t care, they will still get their money, interest included.

I have to agree, $6,000 isn’t really enough to declare bankruptcy over.

13

Boris dear…if you are EVER gonna get access to those funds in the trust account…borrow against them! Get a loan, over say 3 years, with the trust for collateral, and pay off everyone, then CUT UP THE CARD/CARDS! Credit cards are only good for some people. Many banks will let you make extra payments to a personal loan (in canada they do anyway)and while I dont know the American interest rates, the canadina rates on a pers. loan will run you less than 10 % or so…get a roommate to share costs, and talk to your folks about using thier accountant for your tax problem, and to better manage the trust. I have been through the bankruptcy thing, and have resigned myself to the fact I will never own anything that requires any type of credit. If I hadnt been working for the same bank I used for my accounts, they would have closed the accounts …its really hard to open a new account now, as they routinely pull a credit check.

With the amount you earn, you are living pretty close to the max, you might want to look at that as well.

Good luck buddy.

14

Well, I’m no longer considering personal bankrupcy. It seems that my panic was caused by several different annoying but probably solvable problems.

  1. It turns out, the extra several thousand I thought I owed the IRS was a chimera. I had filed for an extension, payed my taxes, and waited to get information on my other trust account. Turned out I have only one trust account, so I had sent in my original return with no money. The IRS construed it as me admitting I owe a whole second lump of taxes. I have dealt with an account to amend the phantom out of existence.

  2. I finally got paid for a week that had been missed entirely. This allowed me to

  3. scrape together enough change to pay my credit card back into the black.

  4. I killed my credit card. It did not scream or cry as I cut its poor little plastic body into four little pieces. Very noble of it.

  5. I have been being a little better about avoiding the nutritional wonders of Denny’s and KFC (KFC was kind of an icky pleasure, but I love Denny’s. Don’t know why). I’ve cooked for myself several times this week, just like a real grownup.

  6. I am going to try to move to a good cheap-ass insurance plan for my car. I haven’t had an accident in 12 years, except for that one time I was rear-ended with no damage, so I feel okay getting lame insurance.

So I still owe a ton of money to my doctor, my sister, and my credit card, but the monthly payments are doable.

Thanks all, for helping me out of my financial panic.

Nothing I write about any person or group should be applied to a larger group.

  • Boris Badenov
15

Thank you for the update, Boris. Glad to hear you worked everything out!! :slight_smile: