Bankruptcy information is usually not included in hardship letters, but ultimately it is your call. Hardship letters are written to notify creditors about financial problems stemming from divorce, illness, job loss or some other reason. The purpose of the letter is to ask for lower monthly payments, a lower interest rate or some other help while you recover from a financial setback. Hardship plans can be good for creditors because they may prevent customers from defaulting on loans. Bankruptcy is not popular with creditors because in many cases it allows people to eliminate debt without paying.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy eliminates unsecured debt such as credit cards and promissory notes. Mentioning Chapter 7 bankruptcy to your creditor could prompt the creditor to close your account and seek full payment immediately. The creditor knows that if you file for Chapter 7, your unsecured debts could be wiped out in as little as three months. Chapter 7 is known as a "straight" bankruptcy, with a bankruptcy trustee overseeing liquidation and sale of certain non-exempt assets, such as rental property or valuable antiques. Cash from the sale is used to pay creditors, but many people filing for Chapter 7 have few assets.
Chapter 13 Bankruptcy
Another form of personal bankruptcy, Chapter 13, is also a threat to creditors, although the goal for the person filing for bankruptcy is a debt restructuring, usually allowing him to fully repay debts over three to five years. However, that doesn't always happen. People in Chapter 13 may use income for reasonable living expenses, with money left over going to creditors. If there isn't any money left, unsecured creditors receive nothing and the debt is completely wiped out at the end of the bankruptcy.
Contacting Creditors
It's a good idea to use the hardship letter to explain your financial hardship while not mentioning the possibility of bankruptcy. List all debts and expenses such as rent, car payment, groceries and utilities. Don't mention frivolous expenses such as eating out or vacations. Also list your income. Send the letter to the creditor's customer service department at the address listed on your billing statement.
Bankruptcy Advice
Visit with a bankruptcy attorney while waiting on a response from your letter. Bankruptcy attorneys usually offer initial consultations for free. Visit with several to learn as much as possible about the bankruptcy process and if it is a good idea for you. However, don't make any commitments. This keeps all your options open as you compare hardship vs. bankruptcy.
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