Filing Bankruptcy When Debt Negotiations Fail

Debt negotiation involves attempting to settle the debt that you owe with your creditors for less money than the full amount you owe. For example, if you owe $10,000, you may try to offer your creditors $4000 and ask them to forgive the rest of your debt. Why would any creditor do that? Because the creditor is afraid you will declare bankruptcy and then they will get either nothing or perhaps less. So, if your debt negotiations have failed, then you may do exactly what your creditors were afraid of- declare bankruptcy. Of course, what happens next depends on what type of bankruptcy you are allowed to declare... but you could find yourself right back negotiating again. 

Chapter 7 vs. Chapter 13 Bankruptcy

There are two different types of bankruptcy, and what happens to your debt is dramatically different depending on which of these two types you file:

• With chapter 7 bankruptcy, non-exempt assets are taken. You turn assets over to a trustee and the assets are sold at a bankruptcy sheriff's sale. The proceeds raised from that sale then go to your creditors to try to repay at least some of the debt you owe. Anything left on your debt after the creditors get the money form the sale  (other than exempt debts and secured debts) is forgiven and wiped clean.
• With chapter 13 bankruptcy, you get to keep your stuff--- but your debt is not magically wiped away. Instead, you have to put together a payment plan (that your creditors agree to) wherein you agree to pay back at least some of the debts you owe. The Chapter 13 repayment plan usually lasts anywhere from 3-5 years and during that time, you make your monthly payments to a trustee who distributes those payments to creditors.

So, you may wonder why anyone would want to declare Chapter 13 and end up having to negotiate a payment plan with the very creditors they failed to come to an agreement with before bankruptcy. While, to declare Chapter 7, you have to make either below the median income in your state or you have to pass a means test wherein you show you can't pay your debt and support yourself. If you make too much money, the bankruptcy code limits you to Chapter 13 only.

Getting Help

If debt negotiation options have failed and you are facing bankruptcy, then you need to call a lawyer. Your lawyer can explain to you what type of bankruptcy you are eligible for and can help you file the right papers and move through the process efficiently, negotiating with your creditors and interfacing with the court on your behalf.