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I was reading the Q&A section of bankrate.com — a very good, comprehensive personal finance site, with lots of debt management and college finance information — today and happened across a question from a recent grad with an all-too-common problem - $100,000 in student loan debt plus more than $65,000 in credit card debt. The grad has never made a late payment and has relatively low interest rates. In addition, they have a full-time job, but no house or car of their own. They’re able to make the minimum payment on their student loans each month but not the credit card payment. Therefore the grad was considering filing for Chapter 7 bankruptcy and was asking if that was a good idea.

The response from Justin Harelik, a Bankruptcy Adviser, was to administer a self test. Remember: while administering the test, try to cut back on “entertainment” expenses as much as possible. This will free up a little more money during the test period. So here’s what you do:

Try to pay the minimum payment on each credit card either at the beginning or by the middle of each test month. If you cannot afford the minimum payments, then you must consider Chapter 7 bankruptcy. If you can afford the minimum payment only, but you still need to use the cards before the end of the month for reasonable and necessary expenses, then you must consider credit counseling or bankruptcy — Chapter 7 or Chapter 13.

If you can afford the minimum payment plus 3 percent to 5 percent more, but you still end up using the cards by the end of the month, then you can look into credit counseling or bankruptcy — Chapter 7 or Chapter 13.

Once you complete this basic test, look into these options prior to filing bankruptcy:

• Call the creditors. Try to negotiate lower or frozen interest rates. It is worth a call to see whether the creditor will work with you.
• Credit counseling. Contact a local consumer credit counseling agency and request a consultation.
• Debt negotiation. This may be impossible in your situation unless you can produce lump sums to pay the accounts immediately. The creditor may prefer to sue you and get a judgment that is enforceable for over 30 years. Do not waste your money unless you can produce significant lump sums immediately.

Just remember to stay committed to any decision that you make.. Failing to act will only prolong your current feelings of frustration.

Would Chapter 7 help graduate?  [Bankrate]

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