What if You Can't Qualify For Bankruptcy?
Written by: Kristy Welsh
Last Updated: October 2, 2017
We respond to questions on our discussion forum from people who are $75,000, $100,000, or more in debt. Due to the changes in bankruptcy law in 2005, many people who could have filed for Chapter 7 bankruptcy in the old days are now out of luck. They don't qualify for CH 7 bankruptcy because they can't pass the bankruptcy Means Test. If you have found yourself in this situation, we have some ideas for you that just might help you settle and/or pay off your debts.
Use Equity in Your Home to Pay Off Debts
Can you refinance your home and pull cash out to pay off your credit cards? This assumes good credit and enough equity to make the refinance worthwhile to you and your family. If the answer is no, then go to our next tips. If the answer is yes, then contact your lender to see if you can refinance your home to pay off your debts.
Use Saved Cash to Settle Your Debts
You would be amazed how many people do have some cash to settle their debts, but want to hang on to it instead of paying off credit cards. This is a mistake as the interest on your credit cards can be as much as 30 percent. You should run the numbers to see if it makes sense.
Let's say the numbers are overwhelmingly in favor of paying off cards versus keeping money in a savings account. There may be another reason to hold off spending your cash: emergency reserves. If you don't want to use your cash because you want it as an emergency fund, this might be a good idea. If you're unemployed or your employment situation is shaky, having reserve cash can get you through some tough times.
Here are a few questions you should be asking yourself:
- Your savings accounts are paying what interest rate per month?
- What is the interest on your credit cards? How much in finance charges are you paying per month?
- Do you feel more secure having a little cash saved?
If the answer is no, you don't have cash, or no, you don't want to use it, then go to the next tip. If the answer is yes, you have cash and want to use it, then you may be able to settle your debts with the credit card companies. Read our article on How to Negotiate Your Debt With the Original Creditor to learn how to negotiate and settle your debts for a fraction of the amount owed.
Utilize a 401K or a Retirement Fund
Accessing your 401K or retirement funds is sometimes a route people may want to take. You must be careful about this, though, especially if you are near retirement age. Taking out money from 401K or investment mutual funds makes the temporary (we hope) loss in your portfolio permanent. Why is this? If you hold on to your mutual funds portfolio, they have a chance to recover. If you withdraw money now, you are essentially selling at the low point of your mutual funds. Here are other things to consider when pulling funds out of your 401K or IRA.
If you cannot do any of the above, you have no choice but to......
Stop Making Credit Card Payments
This might sounds ridiculous, but really, what other option do you have? You are really backed into a corner here. Stopping the payments to your creditors is what happens when you file for bankruptcy, so you are creating your own bankruptcy status. If you create your own "bankruptcy" by not paying your cards, you are doing so without the hassle of the court system, but also without the protection of the court system.
Let's say you did qualify for a bankruptcy - what are the advantages and disadvantages to filing a BK Chapter 7?
Filing Bankruptcy Chapter 7
- You don't have to make payments on your credit cards.
- All of your debts are wiped out, your creditors will not be contacting you.
- Your credit is ruined for 10 years, you will have a tough time getting an unsecured credit card, and it's tough to get a bankruptcy off your credit report.
By Not Paying Your Credit Cards
- You don't have to make payments on your credit cards.
- All of your debts are not wiped out and your creditors will start hounding you.
- Your credit is ruined for seven years. Late payments and any corresponding collections only stay on for 7 years from the date of first delinquency. You will have a tough time getting any credit for a while.
- It's possible to fix your credit before the 7 year reporting time is up.
Not Paying Your Debts vs. Filing Bankruptcy
Your strategy should be:
- Stop paying your bills.
- Put aside the money you were paying the credit card companies into a separate saving account. This will be used for possible settlement with collection agencies later.
- Save all correspondence from credit card companies and collection agencies.
- Don't answer the phone unless you want to talk to the credit card companies or collection agencies. Talking to them is not recommended.
- Once you get a letter from a collection agency, send them a debt validation letter IMMEDIATELY.
- Once you have enough money saved, you should attempt to settle your debts with the collection agency. You can settle for 10 to 25 percent on the dollar.
If You Stop Making Payments on Your Credit Cards, What Happens?
|Time From Last Payment||Action Taken Against You||Who is Holding Debt|
|0-30 days late||Nothing||Credit Card Company|
|30-60 days late||Phone call from credit card company or letter reminding you to pay.||Credit Card Company|
|60-90 days late||Increasingly urgent phone calls from credit card company or letters reminding you to pay.||Credit Card Company|
|90-120 days late||Increasingly urgent phone calls from credit card company or letters reminding you to pay. Possible settlement offer letters.||Credit Card Company|
|120-150 days late||Phone calls and letters, possible settlement offers, possible charge off.||Credit Card Company|
|150-180 days late||Phone calls and letters, possible settlement offers, possible charge off.||Credit Card Company|
|180+ days late||Charge Off||No One|
|6-8 months late||Sold/Assigned to Junk Debt Buyer or Collection Agency||JDB/CA|
|8-12 months late||First contact made by CA/JDB, either by phone, letter or mark on credit report. Possible lawsuit.||JDB/CA|
|12 months until Statute of Limitation expires||letters, calls, possible lawsuit||JDB/CA|
Frequently Asked Questions
Q. Do credit card companies sue you?
A. No. First of all, let me define a credit card company as any financial institution that issues a credit card, which could include your independent small bank or a credit union. Credit card companies either sell or assign bad debts to collection agencies or junk debt buyers. Credit card companies write off the bad debt and take the tax benefit.
It is a collection agency or junk debt buyer that could sue you. In some cases, the collection agency or junk debt buyer will name the credit card company as the plaintiff in the lawsuit, which is not quite legal, but gives them advantages.
Q. Do you know which collection agency will get your account once it is charged off?
A. No. It is impossible to guess which collection agency will get your account after it is charged off. Bad debt paper is sold on the junk debt market to the highest bidder. In some cases, your credit card account will NEVER be sold or assigned to a collection agency.
Q. Do collection agencies ALWAYS sue?
A. No. In some cases, even if a collection agency is known for filing a large amount of lawsuits, they may not sue you. It is impossible to predict whether or not a collection agency will sue you.
Q. Can a collection agency or credit card company seize my house, garnish my wages or get into my bank accounts?
A. No one can ever seize your home - most states have homestead exemptions protecting your home from creditors. Since credit card companies do not sue - your credit card company would never seize your assets.
If a collection agency sues you, you can beat them in court. If they do win a judgment against you (another big if), yes, they can garnish wages and get into your checking account.
Q. When am I "safe" from lawsuits or when can I stop worrying about my debts?
A. You will be "safe" from lawsuits when the statute of limitations on your debt is up or you settle with the collection agency.