TEXT OF INTERVIEW
STEVE CHIOTAKIS: A few weeks ago we introduced you to Kandy and Russell Hildebrandt. The couple got themselves trapped under a mountain of credit card debt.
Kandy Hildebrandt: Well, at its worst, when we started the program we were about $106,000 in debt. Most of that was personal credit cards.
They were able to climb out of the black — er, red — hole of debt the old fashioned way. Russell got an extra job and they cut back wherever they could. But many of you wrote in to ask why the Hildebrandts didn’t just declare bankruptcy.
Well, bankruptcy isn’t for everyone. Although there are a lot of people filing: more so than anytime since rules changed four years ago.
We asked Leslie Linfield of the Institute for Financial Literacy who should consider bankruptcy
Leslie Linfield: They’re being sued, they have credit cards that are going to judgment, their wages are at risk of being garnished, their home may be at risk for foreclosure. They owe more than they own, that’s insolvency. They tried alternative debt management options, and it hasn’t worked out.
Chiotakis: Options such as?
Linfield: So, they may have already tried to do a debt management program from a credit counseling organization. They may have already tried to a debt settlement program and that hasn’t worked out successfully. They’ve tried to negotiate with the credit card companies directly and that hasn’t worked. Bankruptcy is typically the final stop in the “I’m trying to get out of debt” solution. They pick up the phone, they call an attorney.
Chiotakis: I suppose a lot of people would fit that description that haven’t filed for bankruptcy, right?
Linfield: Absolutely and that is one of the things that we discover when we’re talking with individuals who are contemplating it. Many Americans will struggle trying to repay humongous debt loads and they probably should’ve consulted an attorney much earlier in the process.
Chiotakis: There are several types of bankruptcy, but two in particular — Chapter 7 and Chapter 13. What’s the difference between the two?
Linfield: These are the two most common chapters that individuals will file. Chapter 7 is a complete liquidation, where the idea is you take all your assets — those are the things you own — the court would sell them off to pay the creditors — and those are the people you owe. Now, there are certain exemptions, so you’re not living in a box necessarily.
And the other chapter is a Chapter 13, commonly known as the “wage earner’s plan.” So that implies you have to have some means, a job to be able to repay your creditors. And this chapter is very popular for those who are trying to keep their home, particularly in a foreclosure situation. And under Chapter 13, you go to the court, you work out a repayment plan and the creditors do get some payment back on the bills
Chiotakis: What will bankruptcy mean for your credit and finances going forward?
Linfield: Initially, it has a negative impact on your credit report and it will show there for 10 years. But as I like to tell people, time heals all wounds. Some things will survive your bankruptcy. You may keep your car, you may keep your home through a bankruptcy. You’re going to continue to make those payments. The way a credit score is calculated is it pulls much more heavily from more recent information than old. So as time passes and you’re making those payments, it’s going to reflect that as current and that’s going to be more positive.
Chiotakis: We talk about so many delinquencies and foreclosures and bankruptcies, of course, because of the financial crisis. Will these events, do you think, have that much weight on the credit score?
Linfield: They definitely will if you look at it individually. But this is an extraordinary time in our history. And as we look back, I think credit granters five years from now, 10 years from now are going to look back at this time in our history, they’re going to look at people as a grouping. And they’re going to remember this period of time in our history and remember that many people went through a very difficult time period. Creditors in the future will probably be more forgiving
Chiotakis: Such a fascinating topic. We thank you for your time. Leslie Linfield, executive director of the Institute for Financial Literacy. Leslie thanks
Linfield: My pleasure.