Can I get debt forgiveness if I owe my family $50,000?

Dear Penny,

I am soon divorced after 20 years of marriage and 5 years of separation. I will not have alimony or alimony after the split.

What is the best way to eliminate my debt, ie debt cancellation? My income is at poor level, I may add.

Over the years, I have loaned my family over $50,000 without repayment, and lawsuits are not contemplated at this time. I have roughly the same amount of debt. It’s all my fault, because I shouldn’t have been so naive and generous, but I never expected to be single again as a mature adult woman.

Also, debt consolidation is not affordable because I have researched this process and the interest is too high.

-K.

Dear K.,

When you don’t have much hope of repaying your debts, bankruptcy is often the best course. I think that might be the case here, given that you have $50,000 in debt and you don’t have a lot of income.

you could try credit counseling first with the aim of making your debt more manageable. (If you decide to file for bankruptcy, a credit counseling course will also be required.)

A credit counselor won’t get your debt forgiven, but they may be able to help you by consolidating all your debts into one monthly payment. Or they could negotiate with your creditors to allow you to pay off your balances over a longer period. The websites of the Financial Advisory Organization of America and the National Credit Counseling Foundation (NFCC) are two good resources for finding a reputable credit counseling service.

But if you can’t pay your debts, bankruptcy is probably the most viable option. Chapter 7 bankruptcy, also called liquidation bankruptcy, allows people with limited incomes to pay off much of their unsecured debt, such as credit cards and personal loans. It’s not a decision to be taken lightly, but it looks like you’ve done your homework. The purpose of bankruptcy is to allow people to wipe the slate clean when their debt has become unmanageable.

You are generally considered a good candidate for Chapter 7 if your unsecured debt is more than half of your income or if it would take you more than five years to pay off your debt.

One of the biggest disadvantages of bankruptcy is the impact on your credit. But often, by the time someone files for bankruptcy, their credit has already plummeted.

A Chapter 7 filing stays on your credit reports for up to 10 years, but the impact on your credit score will begin to fade after the first two years. You could start rebuilding your credit immediately upon discharge from bankruptcy by getting a secure credit cardwhere you deposit a deposit which becomes your line of credit.

If you decide that bankruptcy makes sense, be sure to consult a lawyer as soon as possible. This is all the more important if you are in the middle of a divorce, which could complicate things. Some offer a free consultation or will offer one for a reasonable fee. If you have assets like a house or a car, be sure to ask if you would be able to keep them, which is often possible in Chapter 7.

Two points of caution here: first, you may see companies advertising “debt relief” or “debt forgiveness”. Stay away.

What these companies often provide is called debt settlement. Essentially, you stop making payments to your creditors and pay the debt settlement company instead. Once you stop making payments (and kill your credit score in the process), the company steps in and negotiates a settlement on your behalf. At this point, since your creditors aren’t being paid, they’re often willing to accept a lower amount, because getting something is better than getting nothing.

You will pay the company a fee, usually a percentage of the balance given to them. In addition, you owe ordinary income taxes on any amount that is forgiven.

My other big concern is that you might find yourself in this situation again. You seem to have a hard time saying “no” to your family members. It’s a habit you need to break if you want to rebuild your finances. Make it a policy not to lend money to anyone. It may sound harsh, but it’s the only way to prevent this situation from happening again.

Many people find that rebuilding their finances after bankruptcy is quite doable. With patience and steadfastness on your part, I believe you can find the fresh start you need.

Robin Hartill is a Certified Financial Planner and Senior Writer at The Penny Hoarder. Send your tricky money questions to [email protected].


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