Alabama Debt Collection Lawsuit Questions — Part Four — Option of Bankruptcy
You can find part one (what is the collection lawsuit), part two (being served), and part three (overview of your five options).
You are also welcome to watch the entire video (over two hours long) on youtube.
Now let’s turn our attention to your first of five options — filing bankruptcy.
IF I FILE BANKRUPTCY…
“Why is bankruptcy such an extreme option?”
Now let’s really dive into the first option of bankruptcy. So why do I say bankruptcy is such an extreme option?
Well, when you file bankruptcy that is going to be on your record. In other words, 25 years from now if somebody says, “Have you ever filed bankruptcy?” you’ve got to answer that honestly and say “yes”.
What about your credit report? Well, it stays on your credit report for many, many years.
So you can kind of think of this almost as the nuclear option. This is when all else fails, there’s no hope, no light at the end of the tunnel, and there’s nothing else you can do, then you look at bankruptcy.
“Is bankruptcy really a life-altering event?”
Because it stays on your credit report for so long, and you always have to say, “Yes, I have filed bankruptcy.”
It also greatly impacts your ability to get future credit.
Now, when it’s appropriate, and it in extreme circumstances, this can be extremely effective but you’ve got to go into it with your eyes wide open knowing this is going to make a major change in my life.
“What is the difference in a Chapter 7 and Chapter 13 bankruptcy?”
A Chapter 7 is sometimes called a “straight bankruptcy”. It’s where you’re trying to wipe out your debt. Now, there are certain debts you cannot wipe out, but generally credit card and other consumer debt you can wipe out if you qualify.
So the idea is you file the bankruptcy and then a short period of time later, your debts are discharged, or wiped out.
Chapter 13 bankruptcy is often called “debtor’s court”, and the idea with Chapter 13 bankruptcy is we’re going to get all of our debts together and we’re going to make payments over three or, more commonly, five years. And so we’re making payments into court and then the bankruptcy court distributes the money out to your various creditors.
So you can think of Chapter 13 as a reorganization to get some breathing room and then get a plan to pay everything back over three to five year.
“Do I still need to file an answer if I have decided to file bankruptcy?”
Sometimes people will say, “Look, I’ve made the decision. I’m that unusual case where it makes sense to file bankruptcy, and I’m going to file bankruptcy in two months so I’m not going to file an answer.”
Well, that’s a really bad decision. You need to file an answer, or get your bankruptcy lawyer to file an answer, if you’re filing bankruptcy.
And sometimes people will say, “Why? I mean, who cares if they get a judgment against me? I’ll just wipe it out in the bankruptcy.” That’s assuming that you qualify for a Chapter 7 bankruptcy, it’s assuming that you qualify for any type of bankruptcy – pretty strict rules now on who can file bankruptcy – and even if you can wipe it out, that judgment still exists.
It’s still on your credit report. So why would you have a judgment and then a bankruptcy? You could just file the answer and avoid a judgment. Then as soon as you file bankruptcy then you let the court know, “Hey, I filed bankruptcy,” and that will normally stop everything.
So yes, definitely file an answer even if you’re confident you will be filing bankruptcy.
“What does filing bankruptcy do to my credit reports?”
The bankruptcy will be reported on your credit reports that you have filed a Chapter 7 or a Chapter 13 bankruptcy and stays on there for many years. And the accounts that are wiped out in bankruptcy, they will show that they have been discharged or included in bankruptcy. They should show a zero current balance because once you are discharged from your debts, you do not owe those debts anymore.
Many times the creditors and collectors will want to show a balance on discharged debt. So you have to look at your credit reports after a bankruptcy if you choose this option.
“Will filing bankruptcy help or hurt me to be able to buy a house in the future?”
This is a somewhat complicated answer, and here’s what I mean by this. Normally, we’d say, “Look, filing bankruptcy is normally going to really hurt you in buying a house in the future.”
And that’s absolutely true.
There are a lot of types of loans that, for a period of years, you cannot even qualify for them. Regardless of what else is going on financially.
But there can be a situation where you’re so overloaded with debt – maybe you’ve had your income drastically cut – and there’s just no way out of it. Well, in that situation, you may not be able to buy a house anyway so it’s better to go ahead and do this extreme option of bankruptcy. Pay the price now, and then after you wait the number of years you need to for your particular type of loan, then you may can qualify for that loan.
So will filing bankruptcy help or hurt me to buy a house in the future? It just depends. You need to talk about that and look at your unique situation, and figure out for you, is this helpful or hurtful?
So now what?
Next, we will cover the option of you fighting the lawsuit on your own — without hiring a lawyer.
Thank you for reading this and I hope these questions — and answers — are helpful to you.
Feel free to call us if you have a question about a collection lawsuit in Alabama — you can call us at 205-879-2447 or fill out our contact form and we’ll email or call you right back.
Look forward to talking to you soon!
PS — You may also want to get our checklist to use when you have been sued by a debt collector in Alabama — it is free for you to download.