Among the choices for dealing with a debt judgment,
declaring bankruptcy is the nuclear option.
Bankruptcy is a powerful weapon for wiping out debt, but comes
with serious consequences for the debtor who pushes the button.
On the plus side, filing for bankruptcy halts collection
action. A Chapter 7 proceeding generally wipes out unsecured debts, including debt
judgments, while selling off your property that is not protected under state
and federal exemptions. Under a Chapter 13 proceeding, debtors enter a
repayment plan to wipe out a portion of their debts over three to five years.
"Having assets and income to protect are an important
hallmark of a need to file bankruptcy," said Robert Lawless, law professor
at the University of Illinois and member of the National Bankruptcy Conference.
The average Chapter 7 consumer bankruptcy case filed in 2012 had nearly
$116,000 in total assets and median monthly income of $2,764, according to the Office
of U.S. Courts. For the ins and outs of
consumer bankruptcies, check the U.S. Bankruptcy Court's "Bankruptcy
Costs for legal fees are typically around $1,500 or more,
limiting the bankruptcy option. A study by the National Bureau of Economic
Research found that the most cash-strapped consumers lack the funds to file bankruptcy.
Other drawbacks include restrictions on filing bankruptcy again -- such as an
eight-year wait for filing another Chapter 7 case -- and a 10-year demerit on
your credit report.
For those reasons, bankruptcy may be more useful as a bargaining
tool in settlement talks than as a plan of action. "If you pay back 10
cents on the dollar, that's
still more than debt buyers are paying for the debt," said Rex Anderson, a
consumer lawyer in Michigan.
Main story: Court judgments for debt: after the gavel