What to Know if Bankruptcy Is Imminent

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6 tips from Bills.com help consumers prepare

With bankruptcy filings increasing, Americans who face serious financial difficulty should consider all of their options before taking action, said Bills.com president Ethan Ewing.

Just over three years ago, the U.S. Government enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, widely known as the Bankruptcy Reform Act. Bankruptcy filings surged in late 2005 as struggling consumers rushed to beat the law's implementation, then fell for the next two years.

But in the federal fiscal year ending Sept. 30, 2008, filings again soared, with more than 1 million nationally in the struggling economy. Continued economic pain will drive more Americans to file for bankruptcy, many observers believe. Some predict filings will reach 1.2 million this year.

Ewing's company Bills.com, a free online consumer portal, has compiled the information consumers need to know if they are considering filing for bankruptcy:

1.    Pull a credit report first. Every individual is eligible for a free copy of his or her credit report each year. Visit http://www.annualcreditreport.com or call 877-322-8228 to obtain it. Individuals can use the report to confirm all information is accurate and, in a bankruptcy filing, to be certain all creditors are included in the filing.

2.    Consider all other options first. These include the following:
a.    Creditor negotiation - Consumers who cannot make even minimum payments on bills can try calling creditors and asking for temporary hardship status. Some creditors may work out payment plans. Pro: Can provide longer payment terms. Con: Individual consumers may find it difficult to negotiate effectively with large creditors.

b.    Credit counseling - Credit counseling agencies may receive their funding from creditors and construct "debt management plans" that reduce interest rates, but not principal owed. "It is important to be careful when choosing a credit counseling agency, as many agencies receive funding from creditors and may have incentives that are not in alignment with their customers," Ewing cautioned. "Also, do not be impressed by those that claim to be nonprofits. In a recent audit of the industry, the IRS revoked the nonprofit status of the majority of credit counseling agencies it reviewed." Pro: Lower monthly payments. Con: Up to five years of making payments. Monthly payments may not significantly decrease. Enrollment in credit counseling appears as a negative on a consumer's credit report.

c.    Debt resolution - Debt resolution firms negotiate with creditors on the consumer's behalf to lower principal amounts due. Consumers then pay the firm a fee for the services provided. "Debt resolution can obtain significantly better repayment terms than achieved with Chap¬ter 13 bankruptcy - and with no bankruptcy judgment - especially for those facing financial problems because of a catas¬trophic event or medical problems," Ewing said. Pros: Savings can often reach up to half the full amount owed. It is the fastest way out of debt without Chapter 7 bankruptcy; consumers can be out of debt within three years. Con: It can impair a credit score and may not be able to stop collection calls.

d.    Chapter 7 bankruptcy - Bankruptcy reform sharply curtailed Chapter 7 filings, which eliminate most consumer debt. A "means test" determines whether filers qualify for Chapter 7 based on average monthly income over the past five years. Pro: Eliminates debt and can be quickly discharged. Con: Creates a major black mark on the credit report for at least seven years. Many filers lose homes and personal property.

e.    Chapter 13 bankruptcy - Chapter 13 filings, which re¬quire consumers to repay debt on a repayment plan, are available to those whom their state determines, through its means test, have enough in¬come to pay back at least some of their debt. Pro: May reduce debt and stop collection calls. Con: The publicly available bankruptcy judgment remains on a consumer's long-term credit report for at least seven years. Repayment terms generally are less favorable than those found with debt resolution.

3.    Do not wait too long. "The purpose of bankruptcy is to help individuals and families protect their remaining assets in the face of overwhelming financial problems. If you suspect you must file for bankruptcy protection, try to do so before you lose precious assets," Ewing said. "Complete the mandatory credit counseling sessions - required through the 2005 bankruptcy reform - as soon as possible to keep the process moving."

4.    Save money to file. Since the Bankruptcy Reform Act took effect, the filing process is more expensive. Filers must pay higher court fees, as well as costs for mandatory credit counseling sessions before filing.

5.    Do not try to go it alone. The new bankruptcy laws are extremely complicated. Most experts advise consumers to hire an attorney to file bankruptcy for them. Be aware that attorneys' fees for filing bankruptcy have increased in the past three years.

6.    Inform creditors and collectors. "Once you tell a debt collector that you have filed for bankruptcy protection, that collector is required to quit calling you," Ewing noted. "Provide the collector with the date and county of filing, and your attorney's name and number."

Some Americans are urging Congress to further reform the bankruptcy laws, but it is unlikely any significant changes will be made in the near future, Ewing said. "In the meantime, know your options. Even if you face severe financial hardship, plan for your future and make the best choice for your situation."

About Bills.com (http://www.bills.com)
Based in San Mateo, Calif., Bills.com is a free one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. As the online portal to Freedom Financial Network, LLC, the company has served more than 50,000 customers nationwide since 2002 while managing more than $1 billion in consumer debt. Its RSS feed is available at http://www.bills.com/news_releases/.

Bills.com holds the No. 257 spot on the Inc. 500 list for 2008, and the No. 3 spot on Entrepreneur Magazine's Hot 100 list of the fastest-growing U.S. companies. Company co-founders and co-CEOs Andrew Housser and Brad Stroh were named to the Silicon Valley/San Jose Business Journal's "40 Under 40" list in 2008, and were recipients of the Northern California Ernst & Young 2008 Entrepreneur of the Year Award.

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Aimee Bennett

Ethan Ewing
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