Should you file for bankruptcy?
I get this question all the time. Of course, since I am a board certified bankruptcy specialist, that’s to be expected.
Deciding to file bankruptcy is a difficult decision. Nearly all who I talk to have struggled to avoid filing bankruptcy. They hope against hope that it will "get better" and their financial woes will heal themselves. The hardest thing for many is to come and see me in the first place. Most are really glad they did, because, as it turns out, bankruptcy doesn’t work the way most people think.
Can you avoid bankruptcy totally? Perhaps. I always look at non-bankruptcy alternatives, including budgeting, as possible ways to avoid filing bankruptcy. You need to get a pencil and calculator and see whether or not, with the money available each month after paying your current living expenses, you can pay down your bills at the current interest rates in 3 years? If the answer is no, keep going.
• reduce expenses,
• increase income,
• sell assets to make that possible?
Don’t rob your IRA's or 401K plans to pay bills. These accounts are protected from collection actions by creditors. Retirements are hard to build back up once spent, and frequently overlooked, using retirement accounts to pay bills may create tax debt!
The tax debt is not wiped out in a bankruptcy.
If you can't pay off your bills in three years, will a debt management plan or bill consolidation loan do the trick? Probably not, for most folks. Paying bills with borrowed money rarely gets you out of debt. Your creditors may cease collection actions against you if you are in a DMP (debt management plan), but often they do not. I see many folks come in to discuss bankruptcy only after being sued while in a DMP. They have lost thousands of dollars and months or years of time – all wasted, as it turns out.
If no other choice will probably do the trick, then you should consider bankruptcy. It is not a sin, not a crime, and could be the best alternative you have.
There is no single test that tells you if bankruptcy is the best choice for you. The best way to find out is to consult with a bankruptcy specialist.
Generally, if you support others, children or even your parents, your debt will be larger, your savings smaller, and the more likely you will be considering bankruptcy as the right alternative.
If you have lost your job, due to layoff, or health reasons, you may have no choice but to file for bankruptcy. But, remember that if you have no paycheck to garnish, it may be wise to wait until later to file. This can be tricky, since creditors who sue you can attach liens to real estate, and I have seen even credit card creditors foreclose on houses. So it makes sense to talk to an attorney before things get that far. Most attorneys offer a consultation for bankruptcy advice at no charge.
If your bills are causing such stress that it interferes with your ability to work, parent, or sleep; you should think about bankruptcy to protect your mental health rather than your finances. You cannot successfully function if you are an emotional wreck. Non-financial problems are just as real as debt problems. Many people get divorced, or abuse drugs and alcohol to escape from money problems, when what they need is to get their finances fixed.
Sometimes, bankruptcy cures more than money problems. And often, the problems solved by bankruptcy are a lot worse than the temporary ding on your credit that results from a bankruptcy filing.