Consumers in deep financial trouble face atough choice following President Bush's signingof the new federal bankruptcy act: eitherfile soon for bankruptcy or find ways to avoid whatwill become a tougher process. The new bankruptcyact makes it more difficult for consumers to fileunder Chapter 7, forcing more into Chapter 13. Consumershoping to file under Chapter 7 must meetstrict income means testing and tighter expense andhomestead-exemption standards.
Consumers will have until mid-October to fileunder the old bankruptcy standards. After that,they face the tougher law. But Certified FinancialPlanner™practitioners recommend that consumersexplore the following alternatives before rushing tofile to beat the deadline:
•Stop the bleeding. This isn't fun, but paredown your expenses to the basics: food, housing,car payments, insurance, and so on. Forget the newdigital music player, designer clothes, dinners out,vacations, etc. A spending plan can help you findways to free up more money to put toward yourdebts. Look for ways to boost income and cut criticalexpenses, such as switching to less-expensiveautomobile insurance.
•Have a garage sale. Sell possessions you reallydon't need and put the money toward your debts.Chapter 7 bankruptcy would likely require you tosell the stuff, anyway.
•Cut up the credit cards and pay cash. Amajor illness, job loss, and other financial crisesaccount for over half of all bankruptcy filings. Butexcessive credit card debt often compounds the problem,if not precipitates it. Freeze use of the cards andspend cash; you'll be tighter with your money.
•Attack your debts. There are two ways to dothis. Pay off the highest-interest debts first. This savesyou the most money in the long run. But if these areyour largest debts, it might be more encouraging topay off your smallest debt first and then apply thatmoney to the next largest debt, and so on.
•Don't put your home or retirement at risk.Consolidating debt through a home equity loan or aloan from your retirement plan may seem like a goodidea, but you are putting your home and your retirementat risk if you can't pay them back. Simply withdrawingmoney from you retirement plans is usuallynot a smart idea, either. Your home, retirementaccount, and, in the wake of a recent US SupremeCourt ruling, many individual retirement accounts,are protected in bankruptcy proceedings.
•Call each of your creditors. Some creditorsmay be more willing than you might believe to negotiatesmaller payments or more time. They'd ratherreceive at least something rather than have to dealwith you through bankruptcy court.
•Consider using a credit counseling service.Under the new bankruptcy act, credit counseling ismandatory before filing for bankruptcy. So considerusing their services in the first place and possiblyavoid having to file. A counseling service can helpyou find ways to reduce your debts and negotiatewith lenders and consolidate all your loan paymentsinto a single payment. Be sure to choose a reputablenonprofit counseling service.
This article has been produced by the Financial Planning Association (www.fpanet.org), the membership organization for the financial planning community.