‘It feels like I’m drowning’: I’m crippled by credit-card debt. Should I file for Chapter 13 bankruptcy?

I am making minimum payments toward my debt, but it just keeps piling up, and the payments are not making a dent toward what I owe. It is crippling. I considered filing for bankruptcy and started working with a lawyer.

After I pay my bills and the estimated payment of $1,500 a month for the bankruptcy, I will be left with $100, which scares me.

Due to my income, I did not qualify for Chapter 7. I qualify for Chapter 13. When they calculate my income, they use the gross amount, so it appears that I am bringing enough home to be able to pay an additional $1,500 a month toward my debt.  

My net pay is about $4,800 a month (gross is $6,600), and $3,200 goes toward bills: mortgage, child care, utilities, groceries and insurance. I don’t spend on anything extra. This means that after I pay my bills and the estimated payment of $1,500 a month for the bankruptcy, I will be left with $100, which scares me, because I don’t have savings in case an emergency comes up.

What are my other options? Should I go ahead and file for bankruptcy? What are the pros and cons? 

Indebted

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Dear Indebted,

This is a judgment-free zone.

You will find the answer to your question in the timeline of your repayments, and when they come to an end. People typically file for Chapter 13 if, like you, they have exhausted other routes and they want to avoid foreclosure on their home.

The good news is that credit-card debt is unsecured and, for that reason, your home should not be at risk. Preserving that asset should be your No. 1 priority. Under Chapter 13, you would effectively consolidate your payments to a trustee, who would then distribute them to the credit-card company or companies.

The short-term outlook may seem bleak, but does Chapter 13 give you a medium- to long-term outlook where you can finally be released from this credit-card debt? If you don’t file Chapter 13, will you continue to pay only the minimum amount on this debt and keep racking up interest?

Last resort

Your bankruptcy lawyer should be able to outline the two scenarios for you on a piece of paper. Often, it helps to see a visual representation of your finances so you can deal with the hard facts, rather than the swirl of anxiety that accompanies them.

Bankruptcy should always be a last resort. Anyone reading this should be very careful about pursuing a bankruptcy filing and should only consider doing so with the help of a trusted bankruptcy lawyer.

Chapter 7 bankruptcy does not require filing a plan of repayment, but part of the debtor’s property may be subject to liens and mortgages. Chapter 13 bankruptcy allows a debtor in your position to keep their property and pay their debts, typically over a three- to five-year period. 

Chapter 13 bankruptcy allows a debtor in your position to keep their property and pay their debts, typically over a three- to five-year period.

There are three types of claims, according to the U.S. Courts: priority, secured and unsecured. “Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding.

Secured claims are those for which the creditor has the right to take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor,” the federal court system says.

Chapter 13 comes with a host of risks. Among them are a “far higher failure rate than Chapter 7; high fees and costs; if the bankruptcy fails, you can lose your home and assets; lower chance of success; because of failure, it does not help budgeting skills,” according to Debt.org.

The Florida-based debt-relief organization cautions: “The idea of keeping your home and car and personal belongings is an attractive part of Chapter 13. But if the case fails or is dismissed, protection for those assets disappears. With a fairly high number of unsuccessful cases, this has to be kept in mind.”

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Third-party help

The National Foundation for Credit Counseling is a nonprofit financial-counseling organization that can help you put together a budget and a realistic plan to pay off your debt. Another nonprofit organization, American Consumer Credit Counseling, is also there to help people who are in your position.

Also, 12-step support groups, including Debtors Anonymous, provide a safe space to talk about your background and your emotional life, to share what happened to you, to get information on how you can tackle your debts, and to hear from others who have had similar experiences. 

Bankruptcies are on the rise in the U.S., so know that you’re not the only person facing this situation. Studies have found that the main reason for personal bankruptcy in the U.S. is medical debt, followed by loss of income, an inability to keep up with expenses such as mortgages and, yes, overspending.

If you file for bankruptcy, your attorney will earn hefty fees, so make sure you’re doing it for the right reason. Your lawyer should outline what your financial  future might look like both with Chapter 13 and without it. But given that you are likely paying over 20% APR on your credit card, it’s good that you are addressing this problem and preparing to take action.

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You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter. 

The Moneyist regrets he cannot reply to questions individually.

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