IN DEBT?By Jeffrey Cottrill
If your divorce has left you drowning in debt, credit counseling or even filing for bankruptcy can throw you a lifeline.
Here are some strategies for ending your post-divorce credit woes.
A long marriage usually creates a firm financial stronghold and system for a couple. When the couple gets divorced, the system suddenly gets shattered: assets and debts must be split; a spouse who may have largely depended on the income of the other may be up a creek without a paddle -- and, unfortunately, you may end up with a lot of excess debt.
Sometimes, if the divorce is very bitter, the legal and other professional fees can add up to impossible levels; other times, you end up unexpectedly saddled with your ex's debts. Just having a decent place to live can make it worse if you go on your own or with your children -- especially in areas where housing is extremely expensive.
If divorce has left your finances in ruins, you need to find a way to get back on your feet. There may be several options open to you, depending on your unique situation and credit history. One is filing for bankruptcy; another is finding a way to pay off your debts -- at least to a point where creditors temporarily won't harass you. This may, of course, be impossible -- and unfair to you, depending on the situation (you may not have expected or meant to get in so much debt through your divorce in the first place).
If your income is relatively high, or if you feel that the debts are primarily your responsibility and can realistically pay them over the long run, you may be wisest to do so. You could also consider selling off some of your assets to pay your creditors, which will keep your credit rating in good standing.
Another solution is to have a credit counselor work out an easier payback plan for you. "The primary alternative to bankruptcy is using one of the consumer credit bureaus that are prevalent in most US cities," suggests Keith Meyer, a bankruptcy lawyer in Costa Mesa, CA. "They undertake a kind of mini-bankruptcy without the stigma. They'll arrange a payment plan with a negotiated amount that's less than what you owed; that way, there isn't a bankruptcy on your record." However, the only way to fully repair your credit rating is paying your debts in full. "Even though most of my work is in bankruptcy, I don't primarily encourage people to file for bankruptcy but to pay as much of their debt as they can."
Consumer Credit Counseling Services (CCCS) or Debt Consolidation companies generally offer to help you by reducing all your debts to one affordable monthly payment. These companies contact your creditors on your behalf, and they try to renegotiate the remaining balance, the interest rate, or both.
You'll make small, monthly payments directly to a CCCS, but your creditors usually absorb the lion's share of the fees. Some CCCS companies will take the entire first payment as a fee for their services; these fees won't lower your debt, however, so be sure to find out how each and every payment you make will be applied to your debt.
As with any company you're considering hiring, you should ask the CCCS for references, and check with the Better Business Bureau and Chamber of Commerce before signing on the dotted line.
You also need to know that credit counseling could have a negative impact on your credit report, since your creditors might report that the original balance was renegotiated. But that shouldn't stop you from considering the process: it can be a lifeline when you're drowning in debt.
You could try to negotiate deals with your creditors yourself to get your payments down to a manageable level, but this may be very difficult. It may be easier to restructure your mortgage or car payments in order to make your full debt load easier to handle. But this solution is only viable if you actually have the ability to pay. Many of the people who file for bankruptcy have already tried all the aforementioned alternatives and found they didn't make enough money to handle the payment plans.
The good news is that going bankrupt (like divorce itself) doesn't carry as much of a social stigma as it once did. It's also usually not as disastrous or terrible as you may believe. Although the word "bankruptcy" might stir up thoughts of poverty, failure, confiscation, or just plain guilt, the fact is that bankruptcy is more common today than ever before. "According to the National Coalition for Consumer Credit Rights, someone files for bankruptcy once every nine seconds," note James and John Caher (a lawyer and journalist) in their book Debt Free! (Henry Holt & Co., 1996)
It's not the end of your life or career, not even financially. Desperate to get blood from a stone, some creditors will tell you that bankruptcy is financial suicide, but remember that these are just cheap scare tactics designed to make you give in. Whether your debt problems resulted from a financially chaotic divorce, bad business decisions, a scam, or just personal carelessness, you should look upon bankruptcy as a chance to start anew. If it goes through without any hassle, you'll end up with a clean slate and your debt worries over.
That doesn't mean that you'll escape scot-free. You may have to give up a lot in return for a simpler lifestyle; you will have to pay for a bankruptcy attorney to represent you; and you won't be able to use credit for several years. In fact, bankruptcy may not be the most viable solution for your own situation. Although it will eliminate most of your debts and give you a fresh start, it is still an enormously important decision to make and a relatively traumatic process to undergo. This article is designed to give you an overview to help you consider whether bankruptcy is the solution for you.
How does it work?
In the United States, there are two basic types of bankruptcy for consumers (ie. non-business): Chapters 7 and 13.
Chapter 7 is the simpler and more common form of consumer bankruptcy. All of your debts that are considered dischargeable are eliminated. (Debts that are generally not considered dischargeable include income taxes, student loans, alimony, and child support.) There's a possibility that you may have to hand some assets to a trustee to sell, after which he or she will distribute the funds to your creditors. Fortunately, there are relatively few cases today in which people lose their cars, homes, or other personal belongings merely because of bankruptcy.
"As to procedure, bankruptcy is about the same from state to state, although there are separate exemption systems," explains Susan Brickwood, the president of Brickwood Associates, a bankruptcy law firm based in Los Angeles. Although there are also federal exemption laws -- i.e. an allowance on what you can keep -- for Chapter 7, individual states may opt out of it in favor of their own laws. "California's very generous about what you can keep," adds Brickwood. "Usually, I can tell a person within the first five minutes that they can keep everything."
"California's primary homestead exemption is $75,000 for a married couple, $50,000 for a single person, and for a person over 65 years of age or disabled, it's up to $100,000," says Meyer. "There's also a certain exempt amount in one automobile, tools of the trade, and most of the household items (except for items such as jewelry or art)." But Chapter 7 won't ever exempt you completely from automobile or mortgage payments; you remain responsible for them if you plan to hold on to your house or car.
With a Chapter 13, you pay all of your secured debts (and a portion of your unsecured ones) under a repayment plan approved by the court. Usually, such a plan consists of monthly payments of your net disposable income -- the difference between your income and living expenses -- which is distributed to your creditors. "Chapter 13 allows people to pay back a percentage of their debts," says Meyer, "which helps to reestablish their credit. The disadvantage is that the payments can stretch out from three to five years. But it's useful for a person with a home who's trying to save equity." So you generally file for Chapter 13 if you have assets to protect.
And Brickwood suggests using a Chapter 13 to pay other debts that can't be discharged by Chapter 7. "You could deal with the bill collectors and try to work something out," she says, "but they generally won't wait for the money. It's too expensive for them; they might be working on commission. They don't care if you're out of work or that your kids are hungry."
The pros and cons
Once you've successfully filed for Chapter 7, you're immediately protected from the harassment, threats, and possible lawsuits of creditors -- and once your bankruptcy is discharged, your unsecured debts are gone. Similarly, if you comply with the Chapter 13 plan you agreed to, your creditors cannot hound you. "Once you tell bill collectors that you've filed for Chapter 7, the game is over," says Brickwood. "You've used the magic words and they can't do anything. All your unsecured debts are wiped out."
"The advantage of Chapter 7 is that you get a release of all your unsecured debt upon filing -- closure in a very short period of time," adds Meyer.
However, bankruptcy does have serious consequences to consider. A recent Chapter 7 on your record will make it very difficult or impossible to obtain credit for a while. The Credit Bureau will keep your Chapter 7 on record for 10 years. However, there are companies that offer services to rebuild credit for those who have been discharged from bankruptcy and want to use credit responsibly.
"The bankruptcy stays on your credit report for 10 years, but that really doesn't matter if you start rebuilding credit immediately," says Brickwood. "The only real disadvantage of bankruptcy is that you can't do it again for six years. So the decision must be taken seriously. We usually tell people to wait for six months or so to see if they can become more stable. Can you pay your mortgage? Health insurance? Car insurance? We like to wait to make sure there's plenty of time to come up with a game plan. Our firm specializes in correcting credit reports afterward."
Bankruptcy isn't a loophole that gives you the freedom to take advantage of creditors: it's a financial lifeline that helps you start with a clean slate when you desperately need it. Bankruptcy may be the only way out when your debts result from mounting medical bills, household repairs, or divorce-related fees. But it's not a license to go on wild shopping sprees that you'll never be able to pay for.
"You should prioritize your debts," Brickwood advises. "A big mistake I see from many people is that they pay the wrong things first. They'll pay Visa just because they call four times a day, but they ignore the important debts like mortgages, taxes, and child support." So the first thing you must do before even considering bankruptcy or credit counseling is getting organized. "You've got to get a plan. You may have to see an accountant to help you prioritize."
Despite the relief that bankruptcy provides, it's not a decision to be taken lightly. Again, it's definitely not a way of getting out of your spousal or child support obligations. Bankruptcy should be considered a last resort after you've examined all other possible options.
Can your ex-spouse's bankruptcy affect you?
Yes. A problem that occasionally occurs when a divorced person files for bankruptcy is that his or her ex-spouse gets stuck with some or all of the debts. Suppose that your ex-spouse owes $50,000 on credit cards, and your divorce agreement states that both of you share the debt. If your ex files for Chapter 7, you'll be saddled with the entire $50,000!
"Find out how much each of you owes," says Brickwood. "Always assume your spouse's debts are your debts and your debts are your spouse's debts, because they are. That's what marriage is all about. The law wants to see people responsible for their spouses' debts. Sit down with your spouse and discuss what the debts are, because if you divorce, you may not be able to do that afterward."
Be aware, too, that if your ex-spouse files for Chapter 7, you're only protected if the debt is in his or her name and not in yours. For example, if your divorce agreement specifically states that your spouse will be solely responsible for your credit card debt, but the cards are in your name, then creditors will come after you after he or she files.
You can't use bankruptcy as an excuse to get out of support payments; they're undischargeable by federal statute. But Chapter 7 could make them easier to adhere to simply by eliminating other debts. "Bankruptcy can be a very good idea if you owe a lot of alimony or child support because it gets a lot of other debts out of the way," Brickwood points out. "Once your credit-card debts are gone, you have more ability to pay support, which should be a top priority. If I were a judge, I'd suggest a higher rate of child or spousal support payments after a bankruptcy, simply because you're more able to pay."
So don't worry about losing your ex-spouse's support payments because he or she filed for bankruptcy. Instead, be concerned with any loose ends of joint debt that weren't cleared up before the divorce.
Just like starting over...
Contrary to the traditional image of bankruptcy as a shameful, destitute state, it has become a way of getting back on your feet after financial disaster. Few people who file for Chapter 7 or 13 really are irresponsible deadbeats; many just made poor judgments or had a run of bad luck. In the long run, bankruptcy could be a positive decision. However, make sure to consider it thoroughly before you choose to file. Weigh the pros with the cons; analyze your current situation and whether other alternatives would be more effective; think about everything you have to gain and lose; and if you choose to file, make sure you never, ever have to do so again.
For more information on bankruptcy laws, procedures, and the exemptions and rules in your state, speak to a local bankruptcy attorney.
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