Filing for Chapter 7 or 13 bankruptcy has gotten more expensive since changes in the nation’s bankruptcy laws took effect in 2005. A new study found that people who file bankruptcy face a 55 percent increase in costs since bankruptcy reform.
Bankruptcy Fees for Attorney and Other Services
The study–published in the American Bankruptcy Institute Law Review–was done by Lois R. Lupica, a New York bankruptcy attorney, and Thomson & Knight LLP, and examined data from consumer bankruptcy cases in six states. The costs to consumers was for fees and expenses related to an attorney, the trustee, filing, credit counseling and debtor education, and other professional fees. The median cost of filing Chapter 13 rose to $4,077 in 2007 and 2008; $2,930 in 2003 and 2004. The cost of filing for Chapter 7 rose to $1,399 from $900.
“Greater up-front costs may have hindered some consumers from filing bankruptcy, but there may be other factors at play,” Lupica said in a statement. “There was a large volume of negative publicity in the aftermath of the 2005 amendments, as well as heightened efforts by aggressive debt collection and consolidation firms.”
Other Debt Solutions
Besides the costs, there are other reasons that it makes sense to avoid filing bankruptcy and look for other possible debt solutions. A bankruptcy filing stays on your credit report for ten years. During that time expect to have difficulties qualifying for a mortgage, auto loan, credit cards, or other types of financing. A bankruptcy filing could also cost you a job. With so many unemployed workers competing for jobs, more employers have added credit checks to the job application process.
Using credit cards is a fact of life for many of us, but the days of leveraging ourselves into stratospheric levels of debt are long gone. No longer is it fashionable (or wise) to have accordion files of credit cards in our wallets. Here are some tips for debt management and understanding which debts can work in your favor, which debts are necessary, and which ones are lethal to achieving financial security.
Debt management starts at home: Looking in the mirror and in your wallet
Understanding how you use credit cards is a big step toward eliminating credit card debt. Keep track of your spending for a month and categorize your credit card expenditures. Chances are you’ll immediately notice certain areas where you can cut back or stop spending altogether. Identify where you can cut back, and be realistic. It’s not likely you’ll never order another pizza, but doing it once a month instead of every Friday night is a realistic choice.
Getting to know your debt: What kind are you carrying?
Financial experts typically categorize debt as good or bad. We’re taking a different approach by categorizing consumer debt as good, bad but necessary, and just plain bad:
- Good debt: This represents an investment in your future. Purchase money mortgage loans and student loans are sound investments as long as you avoid borrowing beyond your means. Note that we specified purchase money mortgage loans. A few years ago, home equity loans and lines of credit were funding everything from speed boats to luxury vacations. Borrowing against home equity can be good or bad, depending on your reasons. Interest paid on mortgage loans and student loans is typically tax deductible; consult a tax accountant or financial advisor for details.
- Bad but necessary debt: We’re living in uncertain economic times, and unemployment and loss of health insurance can send your finances straight down the drain. Some credit card companies offer a period of low or no interest for a specific period; this can provide several months for you to pay off a medical bill. There are also dedicated credit cards available to pay veterinary and dental expenses; these plans offer interest free repayment periods depending on the amount financed.
- Bad debt: Meeting your girlfriends for an afternoon of retail therapy? Cash is the new plastic. Take your debit card or cash instead of your credit cards. Avoid getting hooked into opening new credit card accounts; you may receive deep discounts on your purchases for one day, but if you’re paying off your credit card over time, any discount you received is eaten up by interest.
Identify and manage your spending style, your debt categories, and what you owe for each to establish a foundation for planning and prioritizing how to pay off your credit card debt. Seek debt consolidation and credit counseling help to help you resolve unmanageable debt and put your budget back on track.
Your debt reduction plan may involve debt consolidation if you have a lot of bills. Applying for a debt consolidation loan is an option. If you cannot qualify for a new loan because you have too much debt, you may be able to qualify for a balance transfer offer with an existing credit card. Here are some things to consider about using a credit card to consolidate debt.
Low Interest Debt Consolidation
Credit cards tend to have higher interest rates than debt consolidation loans. However, you may qualify for a balance transfer offer at a lower rate of interest. Having good credit might even get you a zero percent balance transfer offer.
When considering low-interest rate credit card transfers, look at the number of months you have at the low rate. Some low rates are only good for a limited time, so it’s important to know what rate you can expect to pay after the offer ends. In some cases low-interest balance transfers are good until transferred debt is paid in full, as long as you stay current on monthly payments.
No More Credit Card Debt
It doesn’t make sense to use a credit card to consolidate debt if you go out and make more purchases on your cards. Once you consolidate debt put your credit cards away or destroy them so you won’t be tempted to overspend. As you pay off your credit card debt make an effort to add extra to your minimum monthly payment. Doing so not only gets the debt paid off sooner, but decreases the amount of interest you pay over the long term