Credit cards are a huge problem in the U.S. A May 21st New York Times article reported that the Standard & Poor’s/Experian Consumer Credit Default Indices shows that the default rate on credit card loans recently climbed to its highest point, 9.14 percent, since the index first began in 2004.

So more people are no longer paying their credit card bills. What are those people who’ve stopped paying on their credit cards doing about their credit card debt?

Hopefully, they’re not paying a debt settlement company to try and “get out of debt.” There are a few cases where using a debt settlement company may be appropriate, but not many. Many debt settlement companies take large fees and tell you to stop paying on your credit card bills. They take monthly payments from you for a long time. Then they make offers to your credit card companies to settle your debts.

Sound like something you can do by yourself without paying the high fees? Yeah, there’s a reason for that – it is.

But many people who are taking the debt settlement route should consider bankruptcy instead. If you’re thinking about pursuing the debt settlement route, ask yourself, “why did I decide that bankruptcy wasn’t for me?” Was it fear? A belief that bankruptcy is too difficult?

You owe it to yourself – and your financial health – to first take the time to do some research. Look around online. The bankruptcy courts have their own websites with plenty of information for potential filers. It can’t hurt you to take the time to educate yourself. You need to know what the potential benefits of bankruptcy are before you commit to the high fees charged by a debt settlement company.

Photo by Alan Cleaver.

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Can you repay a debt to a friend or a creditor before you file for bankruptcy? Yes, you can, but it’s not necessarily a good idea because that repayment may be what bankruptcy law calls a “preference” or a “preferential transfer.”

After you file for bankruptcy, preferential transfers may be taken back by the trustee. Determining whether or not a transfer constitutes a preference is very fact-specific, but bankruptcy law defines a preference as a payment (not necessarily of money) made to or for the benefit of a creditor for a debt previously owed while the debtor was insolvent. To be a preferential transfer, the transfer must be made within the 90 days before filing. Except that if the transfer was made to an “insider” (such as a relative), the trustee can look at transfers made within the year before the bankruptcy filing.

But when you buy something at the grocery store, for example, that’s not a preference because it is a contemporaneous exchange for value. You are immediately getting something in return for your payment.

Section 547 of the bankruptcy code, which governs preferential transfers, contains many other exceptions to the definition of preferential transfers and as mentioned above, the analysis of whether a transfer is a preference is fact specific. If you are thinking of repaying anyone to whom you owe money before filing for bankruptcy, stop and consult an attorney first. My email address is: jweil@jenlawyer.com.

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Because of the automatic stay, a bankruptcy filing normally stops all lawsuits against you. But for a myriad of reasons, not everyone who is planning to file for bankruptcy can do so right away. If you fall into this category, you especially need to keep an eye on your mailbox for lawsuits so that you can respond to them.

Because if you’ve been sued by a debt collector or creditor for a debt and you are planning to file for Chapter 7 bankruptcy, you should defend against the lawsuit, unless you are planning to file the bankruptcy sooner than they can get a judgment against you.

Why respond to lawsuits? Because it slows them down. Debt collectors and creditors count on a large percentage of the lawsuits they file going unanswered. And when a lawsuit goes unanswered, they can get a judgment against you and possibly (depending on what state you live in) collect on that judgment, which may mean taking money from your bank account or garnishing wages.

Dealing with judgments is just a lot of extra hassle you don’t need when you are on the verge of a bankruptcy. Also, judgments stay on your credit report for a long time.

So don’t just ignore a lawsuit. Talk to an attorney about it. If you’re not working with an attorney, check out the court’s website to see if there are any instructions for responding to lawsuits. Go to the courthouse and speak with a court clerk. Many courts have ways of helping out people who are representing themselves.

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While surfing the internet looking for information on Chapter 7 bankruptcy, you may come across articles saying that you should not file for bankruptcy. These articles will cite a myriad of reasons: You’ll ruin your credit score, you won’t be able to get a new job, you won’t be able to rent another apartment, and utility companies will make you put down a deposit.

I say, don’t believe the hype.

You need to do what’s right for you. If filing for Chapter 7 bankruptcy turns out to be the right thing for you, then do it. Don’t let the naysayers get in your way.

Because here’s the thing: Each and every person who is having problems with debt needs to do their own analysis, preferably after consulting with one or more professionals, to determine whether Chapter 7 bankruptcy is right for them. Blanket negative statements about the evils of bankruptcy don’t help with your analysis.

Let’s look at these bankruptcy evils one at a time:

You’ll ruin your credit score. Seriously, folks, if you’re having bad debt troubles, don’t you think your credit score has already taken a beating? Maybe it hasn’t – but you’re likely in a situation where you are just starting to have trouble paying your bills and the troubles haven’t hit your credit report yet.

But if you allow the debt troubles to continue without taking some decisive action, your credit score will eventually go down. Might as well do something about the debt that you can’t pay sooner rather than later, so that you can get to a point where you can start to build up your credit score again, if it’s important to you.

You won’t be able to get a new job. Yes, many employers run credit checks on prospective employees. But many employers do not. Sometimes it depends on what industry you are in. Trying to get a bank job? Banks will probably run credit checks on prospective employees. But many “mom-and-pop” small, non-corporate employers do not. In other words, this is a factor you should consider, but it may not be the end all, be all factor that decides whether or not you file.

You won’t be able to rent an apartment. Here again, some landlords run credit checks and some do not. You probably won’t have your pick of every single new apartment to move into, but you wouldn’t have anyway, because some apartments rent for more than you can afford. This factor depends a lot on what’s available in the area where you want to live. So it’s something to consider, but it’s not the only factor (and not even a huge one, at that).

Utility companies will make you put down a deposit. Utility services cannot be cut off because you filed for bankruptcy. If you owe a past debt to a utility, then you may have to put down a deposit after you file. This is why it’s a good idea to be current on your utility bills prior to filing for bankruptcy.

If you’ve already finished with a bankruptcy, you may have to put down a deposit for a utility company in the future after you move and try to get utilities. But this can happen even without a bankruptcy on your record – for example, if you move to another state and start service with a utility company you’ve never used before, they might ask you for a deposit just because you’re a first-time customer. If you’re concerned about this, you may want to try renting an apartment that has utilities included in the rent.

Bottom line, the evils of bankruptcy are not evils at all – and they certainly should not be what keeps you from filing.

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