First, don't panic. You are not alone. Many people throughout America are having financial troubles due to the economy and have lost their jobs or have been forced to take lower paying jobs. Like anyone in trouble, whether it is your health, buying a car, or buying a house, collect the facts and get more than one opinion. Eventually, you will come to the right decision if you have sufficient information to work from. Keep in mind, that there are many professionals to turn to that are licensed and under stringent ethical rules such as attorneys, certified public accounts, psychologists, certified financial planners and family, friends and clergy can be of assistance. Many do not charge for consultations.
Your financial situation is relative to your earning ability. Typically, people who earn more, spend more. When earnings are cut, something must give. These situations arise when people lose jobs, go through divorces and become ill or get injured. Sometimes people get into trouble because they have been supporting a loved one or because they have gambling compulsions or spending problems. Unless income is severely limited, a bankruptcy of some type may not be necessary until there is more than $5,000 of debt. This is true because bankruptcy generally will cost more than a $1,000. Small amounts of debt can be worked out or paid over time if there is sufficient income. However, if wages are being garnished, filing a bankruptcy proceeding may be the only option.
Do not take action before speaking to a professional. People make several mistakes when in a financial panic that can have repercussions. For example, people will pay credit cards or medical debts (because they are being harassed by collectors) and allow their mortgages to become delinquent. This is a big mistake. Chapter 13 was designed by Congress to protect homes and families and consequently mortgage companies are given special treatment. These rules require the debtor to pay the mortgage first and cure arrearages through a plan payment. However, unsecured creditors like credit cards, medical bills, loans and even student loans are not afforded the same priority and are easily wiped out upon filing a Chapter 7 or 13[1]. Another big mistake people make is to pull money from their IRA or 401(k) plan to pay unsecured debt. Unless all of the debt is paid in full including the tax penalty, this maneuver is senseless. Pulling money from a tax deferred plan simply reduces one's nest egg for retirement or disability while incurring a significant tax penalty[2]. Retirement plans are normally fully exempt in bankruptcy or chapter 13 so that a bankruptcy trustee or creditors cannot reach the funds. Unsecured debt is wiped out while the debtor gets to keep his or her retirement plan. Another big mistake people make is to allow the auto credit company to repossess the vehicle when payments fall behind. In many cases, the vehicle may be saved by filing Chapter 13 no matter how far in arrears and the interest rate may be lowered. If the vehicle was purchased or refinanced more than 910 days prior to the filing of the petition, then only the value of the vehicle must be repaid in a Chapter 13. These are just a few examples of mistakes people make by not discussing their situation with a professional before taking action.
In conclusion, before doing something that is of little benefit or worsens your situation, speak with a professional first. Do not self treat your ailment. Do not ignore problems before they become bigger problems. Do not ignore lawsuits that turn into judgments and then result in wage garnishments leaving you with no funds to hire an attorney. Help is not far away.
[1]Government guaranteed student loans are not dischargeable in Chapter 7, but may be restructured in Chapter 13 but will not be discharged at the end of the plan. Procedures now exist to restructure student loans post-bankruptcy or if certain hardships exist.
[2]The tax penalty is ten percent plus the cost of liquidating the investment, which may include commissions or fees.