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Your Personal “Debt Ceiling”

On July 25, President Obama addressed the country asking the American public to encourage their Congressmen to raise our nation’s debt ceiling. The debt ceiling is the legal limit on the amount of money the United States can borrow. It is analogous to a credit card spending limit; however, while the limit on a personal credit card may be $5,000, the debt ceiling limit is $14 trillion. The U.S. Treasury estimates that we spend about $120 billion more than we take in each month, and this requires borrowing money each month to make up the difference. Since the United States always pays its bills, it is able to borrow money at the best interest rates. The down-side of this is that borrowed money must be repaid with interest; and the U.S. is spending a great amount of its income on paying interest on its loans. Our nation’s spending is clearly out of control.

Sound familiar?

The interest payments on monthly credit card and loan payments can quickly eat up a family’s (or nation’s) income. Take for example the interest on $30,000 in credit card debt at a 15% annual interest rate. Repaying this debt at a minimum payment rate of $600 each month, this loan would be paid off in 44 years and cost $48,913 in interest charges! The Federal Reserve has a Credit Card Repayment Calculator that you can use free of charge to estimate of how long it will take you to pay off your personal credit card balances.

Just like our national government, many Americans have fallen into a vicious cycle of debt. Instead of paying down their credit balances, they make a monthly payment, then use the available credit for food, gas and other necessities. Fortunately, individual Americans can take charge and stop this debt nightmare. The federal bankruptcy law provides a way to eliminate or repay your debt under the direct supervision and protection of a federal bankruptcy court judge.

The Bankruptcy Code offers two distinct ways to deal with out-of-control debt. First, if you cannot afford to pay back unsecured creditors (e.g. credit cards, personal loans, medical bills, etc.), a Chapter 7 bankruptcy will discharge unsecured debts without repayment. Under Chapter 7, you are able to keep and continue paying on secured debts, such as a house or car loan.

Second, if you have a higher income and are able to pay something to your unsecured creditors, Chapter 13 allows you to pay what you can afford over three to five years. Any unsecured debt remaining at the end of the bankruptcy is discharged. Chapter 13 also has useful provisions that allow a debtor to “cure” past payment on a house or car loan; can strip away an unsecured second mortgage; can “cram-down” an under-secured car loan; and a host of other financial options.

The Bankruptcy Code contains many powerful and flexible options for managing overwhelming personal debt. Whether you need time to repay your creditors, or simply need to rid yourself of the debt, bankruptcy may be the most sensible option. Consult with an experienced bankruptcy attorney and discover how the federal bankruptcy laws can help your family.