A blog about debt, credit and bankruptcy

August 27, 2010 By jenleelaw Leave a Comment

Alternatives to Bankruptcy – Part 1B: Debt Consolidation Pitfalls

This is the second in a series of posts regarding the alternatives to bankruptcy. The series will discuss debt consolidation, debt settlement, mortgage modification, and debt management programs.

What are the Pitfalls of Debt Consolidation?

There are several pitfalls to watch out for when considering debt consolidation. The interest rate on the new loan, the length of the new loan, hidden fees associated with the new loan, and potentially turning unsecured debt into secured debt.

One of the biggest key indicators to look at is the interest rate on the new loan. If your credit card is charging you 20% interest and your consolidation loan is 10% interest, it might help with lowering your payments and reducing the amount of overall interest you pay. You also want to keep the interest rate in mind with federal student loans. In the past, rates have fluctuated depending on when the loans were taken out and the federal consolidation loan is based on an average of those rates. If you have a high balance at a low rate, you need to look and see what your new interest rate is going to be before you consolidate.

However, the next thing to look at is the length of the loan. If you have a lower interest rate, but are spreading the payments out over 20 years (or longer), you may end up paying a lot more in interest, even with a lower interest rate. So, looking at the interest rate and the length of the loan together are important steps to understand the total amount you will owe.

Also, watch out for hidden fees in your new loan and make sure you consider the overall cost. For example, if you use a home equity line of credit, there may be an appraisal required or an origination fee. Just be aware of the fees and look for anything that could cost you more money.

Finally, turning unsecured debt into secured debt can be a big problem for some people that use their homes to obtain the consolidation loan. When you have unsecured debt (credit cards, personal loans, etc.), the creditor just has your word that you’ll pay and there is no collateral involved. Once your house is used to secure your consolidation loan, the creditor could potentially foreclose on your house in order to recover the loan payments if you default on the loan.

This is just a basic overview of the pitfalls of debt consolidation and is not legal advice specific to your situation. If you are considering bankruptcy or alternatives to bankruptcy, you should speak with an attorney in your area for legal advice.

August 25, 2010 By jenleelaw Leave a Comment

Alternatives to Bankruptcy – Part 1A: Debt Consolidation

This is the first in a series of posts regarding the alternatives to bankruptcy. The series will discuss debt consolidation, debt settlement, mortgage modification, and debt management programs.

What is Debt Consolidation?

Debt Consolidation involves taking out one larger loan to cover two or more smaller debts. This can be done through a personal loan, balance transfer, or a home equity loan. The original loans are paid off immediately and then you owe a single payment towards the new loan. Debt Consolidation often helps with convenience in making one payment, reducing interest rates owed, and possibly lowering the monthly payment through an extended term on the new loan. However, there are several things to watch out for with debt consolidation, including who should consider it and how to avoid pitfalls. Avoiding pitfalls will be addressed in the second post on this subject.

Who Should Consider Debt Consolidation?

Debt Consolidation may be a good option for you if you are able to make your monthly payments on time each month, but would like to eliminate multiple payments and pay down your debt faster. Debt Consolidation does not necessarily lower the amount of debt you have – you’re not negotiating with the credit card companies or creditors to pay less – you’re just paying them off right now instead of over the next few years, so the ability to continue paying on the new loan is important.

If you have any equity in your home, sometimes a line of credit secured by your home may result in a much lower interest rate and payments. However, there are several pitfalls involved with choosing this option, including hidden fees and changing your unsecured debt to secured debt. These pitfalls will be outlined in the second post on this subject.

Student loans are often a good debt consolidation candidate, especially if your student loans are through the Federal Direct Loan program. Instead of having several smaller loans, you can combine your federal student loans in to one monthly payment. There are a few things to be aware of when consolidating student loans, especially the interest rate and the flexibility involved with repayment on student loans. Both will be discussed in Part 1B.

This is just a basic overview of debt consolidation and is not legal advice specific to your situation. If you are considering bankruptcy or alternatives to bankruptcy, you should speak with an attorney in your area for legal advice.

August 5, 2010 By jenleelaw Leave a Comment

What is the difference between a Chapter 7 and a Chapter 13 bankruptcy?

Many people have heard of the terms Chapter 7 and Chapter 13, but don’t know exactly what the differences are between the two.

In a Chapter 7, you are asking the bankruptcy court to get rid of most of the debts you owe. However, the trustee may have to take some of your property in order to sell it and distribute the sale proceeds to your creditors. Some of your property may be exempt, which means that the trustee cannot take the property and sell it. The property that you can exempt varies based on the state you are filing in and can sometimes be affected by where you have previously lived.

In a Chapter 13, you are establishing a payment plan for paying some or all of your debts over the next 3 to 5 years. The payment plan is based on your monthly income, how much you owe, and the types of property involved. At the end of your payment plan and assuming you made all of your payments on time, the bankruptcy court grants a discharge of your debts. Usually, unsecured creditors (for example, a credit card) receive a small percentage of the actual amount owed and then the rest of the debt is discharged as part of the bankruptcy.

There are some debts that survive bankruptcy and it doesn’t matter whether you have filed a Chapter 7 or a Chapter 13. Child support, most tax debts, and student loans are, for the most part, nondischargable in bankruptcy – meaning, the bankruptcy court will not eliminate these debts as part of your bankruptcy filing and you will still owe them.

This is just a general overview of the differences between Chapter 7 and Chapter 13. There are many other differences that affect your decision to file bankruptcy and you should contact an attorney or read the U.S. Bankruptcy Court website for further information.

July 28, 2010 By jenleelaw 2 Comments

How much does it cost to file bankruptcy?

People who are considering bankruptcy often wonder just how much it is going to cost them to actually file bankruptcy. While attorneys charge a range of fees for Chapter 7 and 13 bankruptcies, the court filing fees are established and set by the U.S. Bankruptcy Court.

In the Northern District of California, the Bankruptcy Court has a website outlining the fee schedule for filing and changes.

For a Chapter 7, the court fee to file the petition is $299. This amount is due to the court on the day your bankruptcy petition is filed. There are some circumstances that allow for payment of the court fee in installments and an application has to be filled out an approved by the court. After the installment application is approved, the court sets a fee payment schedule for the balance of the fees. If you cannot afford to pay the filing fee at all in a Chapter 7, there are special procedures to follow to receive a waiver of the filing fee. I’ll cover these special procedures in a future blog post.

The court filing fee in a Chapter 13 is currently $274. There is not a waiver of the filing fee available in a Chapter 13 bankruptcy. Again, the entire fee must be paid when your petition is filed.

This is just a general overview of the basic fees involved with a consumer bankruptcy. There are other fees that may apply to your individual situation and you should contact an attorney or read the U.S. Bankruptcy Court website for further information.

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