Which is worse, charge-offs or filing for bankruptcy? My husband
was laid off two years ago and we have $100,000 of credit card debt.
I think it is in a charge-off pattern now. I figured less years
on our credit report. We are earning 25 percent of our previous
income, so there is no way we can repay this. We are paying all
our other debts on time as we always have. We just had to live off
the credit cards for a while.
-- Janie Juncture
It's a common misperception that having your creditors charge off
a debt means they've given up on you repaying the debt. That's not
true. They've just given up on you repaying this debt voluntarily.
Negative information stays on your credit report for
seven years, except for a Chapter 7 bankruptcy, which stays on your
credit report for 10 years. Doing the math may lead you to believe
that if you let the company charge off your debt and then wait it
out on your credit report, you're better off than you would be if
you file for bankruptcy.
Here's the important difference between the two strategies.
You no longer owe the money when a debt is discharged by the bankruptcy
court. When you try to wait out a charge-off, you're gambling that
the creditor won't go to court and win a judgment against you, and
then take steps to collect on that judgment. A judgment shows up
on your credit report and can stay there for seven years, or more
in some cases.
Another aspect of waiting out a charge-off is the
statute of limitations that is applicable to the credit agreement.
Once the statute of limitations has expired on the debt, you can
use that expiration to defend against a creditor's suit. Owing $100,000
in credit card debt, it's unlikely that your creditors will fumble
and miss the statute of limitations deadlines in attempting to recover
these debts. The Bankrate feature, "With
old debt, know your limits," has more information about
the statute of limitations aspect of your debts.
If you're currently seeing your unsecured creditors
charging off your debts, you should anticipate that they will turn
the debts over to credit collection agencies, and you'll start to
hear from bill collectors pressing you for repayment. You should
learn your rights under the Fair Debt Collection Act. The FTC Facts
for Consumers guide, Fair
Debt Collection, will help, as will the Bankrate feature, "Your
rights under the Fair Debt Collection Practices Act."
Congress recently passed revisions to the bankruptcy
code that will make it tougher to have debt completely discharged
in a Chapter 7 bankruptcy filing. The law will become effective
six months after the president signs the bill. There's going to
be a rush to file prior to the effective date of the new code. You
should discuss the issues I've raised with a bankruptcy attorney
and decide what course of action is right for you. Don't dawdle.