Charge-offs vs. bankruptcy

Charge-offs vs. bankruptcy
Ask Dr. Don by Don Taylor, Ph.D., CFA • Bankrate.com

Question:

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.

Answer:

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.