In late 2000 I decided my Debt Management Plan (DMP) was not going to work anymore because my monthly rate had been increased four separate times by my creditors. Who knew how much longer that trend would continue for? So I looked into my bankruptcy options because I knew my creditors could not make changes to what a judge ordered.
Coincidentally in January 2001, the investments which had helped fund my DMP stopped paying their monthly dividends. This solidified my decision to pursue filing for bankruptcy as I could no longer afford the $1626 monthly payments to my creditors. And since only two of my thirteen creditors were willing to promise they would no longer increase my payments, I had zero confidence they would agree to lower my payments even if I asked them to!
Back in 2001, you could decide which type of bankruptcy that you wanted to file, unlike today. There are primarily two types of bankruptcy for consumers: Chapter 13 and Chapter 7.
Chapter 13 is also known as a reorganization plan. You list your assets, debts and income, and determine how much of your assets are subject to be taken from you to give to your creditors (your non-exempt assets). Then you propose a plan to the court to pay the bankruptcy trustee all of your leftover income each month, and the trustee distributes this money to the creditors. You might not pay back all of what you owe but if your plan pays back enough to get the trustee’s approval, then the court will probably accept the plan. In exchange the trustee does not take your non-exempt assets. You make monthly payments and you get to keep your stuff! When the plan is done (which can take up to five years), any remaining debts are discharged and you no longer make payments to the trustee.
Chapter 7 is also known as a liquidation plan. Again you list your assets, debts and income. But in this type of bankruptcy you agree to let the trustee take your non-exempt assets if you have any. The trustee then liquidates these and distributes whatever amount he can collect to your creditors. That is all the creditors get, even if they only get 1% of what you owe to them. The balance owed is wiped out and your creditors cannot attempt to collect from you.
(In 2005 the bankruptcy laws were changed in order to get more people into Chapter 13 so you have to jump through a few more hoops to file under Chapter 7).
I chose to file under Chapter 13 because I did not want to sell my house, and I hoped our investments would come back in value later. I had $68,955 of debt that I included in my plan (I kept my mortgage and car loan out of the bankruptcy plan and affirmed that I would pay these in full). My proposal was to pay back 71% of what I still owed. The trustee supported my plan proposal to pay $818 per month for five more years and the court approved it in July 2001.
I had traded my DMP for a bankruptcy but I knew my monthly payment could not be increased!
This worked well for a little over two years. I did not miss a payment to the trustee and I made all of my mortgage and car payments on time. But then “life happened”.
In October 2003 I lost my job. That forced me to miss my trustee payment. I informed the trustee of my job loss and he was gracious enough to work with me to get caught up in November and December after I found a new job. But this got me to reconsider what I was doing. Our assets were within the exemptions allowed under state law. There was nothing that could be turned over to my creditors. So I decided to convert my bankruptcy from a Chapter 13 to a Chapter 7. My attorney jokingly referred to this as a “Chapter 20 Plan”.
In April 2004 my Chapter 7 plan was approved and my bankruptcy was finalized. I still had my house and car (and the mortgage and car loan!) but my remaining credit card and personal loan debts were discharged. I had spent five years of my life making payments to a DMP and then to a trustee. You would think that I had learned my lesson about debt and would have sworn it off for the remainder of my life.
But what happens after your bankruptcy is discharged? You get new credit card applications, even from the same banks that were included in your bankruptcy! Why? Because once your Chapter 7 is done, you cannot file another Chapter 7 for seven years! The interest rates are higher but the cards are available. And you have no debt so in theory you should be able to keep up with minimum payments.
I was able to rebuild my credit over the years and eventually get credit cards with low rates. But as time went by, the urgency to stay out of debt was eventually replaced with staying current with debt and keeping it at a “manageable level”. By 2010 we found ourselves $28,200 in debt, on top of our mortgage.
Consumer credit counseling had not paid off my debt. Bankruptcy had paid off my debt but had not kept us out of debt. The symptoms had been treated but the disease had not been dealt with. Learn how we finally killed the disease in my next post.