Do You Need To File Bankruptcy?

Bankruptcy: file or notDeciding to file bankruptcy can be a tough decision.

Almost everyone confronting the decision swings from “Fight” to “Flee”:  struggle to pay the debts versus get relief from the constant pressure and start over.  Our opinion.

Bankruptcy alternatives

To decide, you need to know what the alternatives are.
Can you avoid bankruptcy on your own: To explore non bankruptcy alternatives, create a budget for your realistic, monthly expenditures for current living.  Include mortgage and car payments, but exclude all other existing debt service.

With the money you have available each month after paying your current living expenses, can you pay off your debts other than car and house at the current interest rates in 3 years?

Forget minimum monthly payments: calculate what it really takes to pay off credit cards at credit card interest rates with this online tool.

Can you reduce expenses, increase income, negotiate rates or sell assets to make that possible?

Retirement savings off limits

Consider long and hard before resorting to liquidating IRA’s or 401K plans to pay creditors.

These assets are generally protected by law from collection actions by creditors. Retirement savings are hard to replenish once spent; but most importantly, using retirement savings to pay creditors may create new debt in the form of income taxes and penalties for early withdrawal.

Your good intentions to repay creditors may just end up substituting Uncle Sam as a tax creditor in place of your existing creditors.

Can you avoid bankruptcy with outside help:

If you can’t pay off your debt within three years on the present terms, contact Consumer Credit Counselors, or a similar, well established non profit organization.

They can help you make a budget and  negotiate a repayment plan  that may include a reduced or even zero interest rate on your existing debt.  Creditors generally cease collection actions against those participating in CCC plans.

These plans usually work best when the debt is primarily credit card debt.

CCC counselors sometimes exclude non dischargeable tax debt from the repayment plan, leaving the consumer paying unsecured, dischargeable credit card debt while non-dischargeable taxes or delinquent support go unpaid.

That approach seldom gets the debtor the relief needed.

Debt settlement plans seldom work.

The media is full of ads for debt settlement schemes:  send us a regular payment instead and we’ll negotiate a deal with your creditors.
Sounds great.  Plays into the universal desire to pay off your debts consistent with your resources.

The only problem is that it seldom works.  But before you’ve figured that out, the debt settlement folks have gotten their money, so they have no skin in the game.

You may have spent a bunch on settling the easy ones, and your problem isn’t solved.

Consider bankruptcy:

If these repayment alternatives are not feasible, consider bankruptcy.

There is no magic formula that tells you whether bankruptcy is the best choice for you.   An experienced bankruptcy lawyer is a great resource.

In general,

  • the older you are;
  • the greater the number of your dependents;
  • the larger your debt;
  • the smaller your cash reserves or retirement savings; and
  • the greater the amount of your debt that is  non dischargeable

the more likely it is that bankruptcy will improve your financial situation.

Read more

How to pick a bankruptcy lawyer 

Chapter 7 explained 

What does it take to file bankruptcy 

Doing it yourself:  what could go wrong

Bankruptcy myths 

Image courtesy of Mrs. Logic.

About the Author
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.