If you’re in the throes of financial hardship, you may think it’s time to declare bankruptcy, but be careful with this. While it is true that this type of option can probably help you if you have no other way out, but for most people, bankruptcy should be taken as an absolute last resort instead of the first thing they think of. With people filing for bankruptcy in record numbers, this is obviously not the case at least at present. Let’s take a look at when bankruptcy is and is not the best choice, and what you can do instead.
What kind of debt do you have?
If the debt you have is mostly unsecured debt like credit card debt, it’s likely that you’re not going to have to file for bankruptcy. This is especially true if you still have a steady income and would be solvent were it not for your debt.
If you have debt that has come upon you all at once (or nearly so) and is staggering, like the medical expenses debt you can acquire after a significant illness, it may very well be that you can’t dig out from under it and that bankruptcy would be your best option.
There are certain kinds of debt that cannot be wiped out via bankruptcy such as tax liens, child support, student loans, and more, and if a major part of your indebtedness is made up of this kind of debt, bankruptcy is not going to be a help to you.
However, no matter where your debt comes from, it’s important that you consult with a bankruptcy attorney before you make any decisions; again, bankruptcy should be an absolute last resort and not the first thing you think of in such a situation.
Do you have a decent income?
Were it not for your debts, could you make ends meet fine? If that’s the case, you can probably come up with a plan whereby you pay back your debts (especially unsecured debt) without having to file for bankruptcy.
Understand that while bankruptcy can be a help to you, it is also not designed to encourage people or entitle people to mis-manage their money. This aspect of bankruptcy was one of the parts that was changed significantly with the new bankruptcy laws, which causes the courts to look much more closely at your financial circumstances before they will approve you to file. Yes, you must be approved to file, it is not an automatic right.
Bankruptcy is not a free ride
Remember that bankruptcy is not a free ride, so if you declare it, it has to be because you are in absolutely dire straits financially and have no other way out. In addition, laws have changed in recent years such that you may not be able to be absolved of your debts as was so often true in previous years. In fact, if your income is at or above the median for your state and has been for the last six months, it’s likely that you’re not going to be able to file for Chapter 7 bankruptcy, which is the type of bankruptcy where all your debts are erased. Instead, you’ll probably be required to file for Chapter 13 bankruptcy, whereby you are put on a plan spanning roughly three to five years, and will be required to pay back your debts on a schedule.
Paying off your unsecured debt yourself, without declaring bankruptcy
It works like this. Sit down and make out a budget that includes JUST your basic necessities — food, utilities, rent or mortgage, car payments, etc. DON’T include unsecured debt payments like credit card payments, and don’t include “extras” like entertainment or a clothing budget except for the bare-bones basics, such as your children’s needs. It’s time to batten down the hatches, so to speak, and get real about paying off that debt.
Take the after-tax income you have left after you’ve budgeted for your necessary expenses and put 10% aside in savings for emergency. EVERYTHING else goes toward your debt. Pay minimum payments on all of your debt and put the balance of what you have left on the highest interest debt you have. Keep doing this every month and you should see your balances pay themselves off almost by default. Best of all, as long as you’re responsible, this should only take a few years to complete (maybe not even that), and you won’t have to declare bankruptcy.