I wanted to title this post “Should you consider declaring bankruptcy?” Honestly, does anyone want to consider declaring bankruptcy? Really. If the thought of declaring bankruptcy has crossed your mind then you have “considered” it. If you have a sense of moral scrupulosity you will loath the idea of bankruptcy. You want to pay off your own debts–you do not want them to be discharged.
You might have toyed with the idea of debt consolidation or a debt management plan. Having these sorts of plans is contingent on employment. If you are unemployed, you will lack the ability to commit to a payment plan. In these economic conditions it would not be surprising that people considering declaring bankruptcy would also be unemployed.
Hence, I am an an advocate of “making peace with bankruptcy”. There are situations that arise when there is no way out of the financial disaster. For many people their financial disaster is a result of a tragedy, not a spending or money management problem. Divorce, extended unemployment, and unforeseen health issues can cause even the most pragmatic saver to become forced into bankruptcy.
If the idea of bankruptcy has crossed your mind, here are four points to consider to determine if you should make peace with declaring bankruptcy:
1. You do not see a time frame when you believe you can get a “handle” on your finances. If you are unemployed and drowning in debt, it is quite reasonable that you will not be able to recover financially. If you do procure a job, your new job may not pay as much as your old job and your current expenses (and perhaps swelling credit card debt) may exceed your paycheck. Thus, if you are unemployed, waiting for a new job may not save you from bankruptcy.
2. You are considering liquidating your 401k to “stay alive”. Remember that your 401k is protected in bankruptcy. Thus, if you are considering liquidating it to “stay alive”, consider the “what ifs”. What if you liquidate your 401k and you still cannot keep up with your bills? You will have lost all of your retirement money. Your credit score may be affected for 10 years, but losing your 401k will haunt you for life.
3. You have substantial student loans. Student loans are rarely discharged in bankruptcy and only in situations where some unforeseen circumstance would prevent the loan recipient from paying back the loan. For example you went to school for graphic design and suddenly became blind. If you filed for bankruptcy you might have a case that you will be unable to pay off your student loans on account of you handicap. Realistically, even if you file for bankruptcy, your student loans will not be discharged and you will still have significant debt. Look at your current income stream less all credit card, mortgage, and car debt. If your monthly payment on your student loans would still be a hardship then you need to consider bankruptcy.
4. The purchases on your credit cards are for basics like gas and groceries. This is a bad omen. When you have cut down your expenses to the “bare minimum” and you rely on your credit card for basic purchases such as groceries and gas, you need to realize that you will not be able to get out of debt. The interest rate on your credit card will cause your debt to swell, making repayment impossible.
If you find yourself in any of these four situations, you need to consider making peace with bankruptcy. Bankruptcy will allow you to have a fresh start and to get your life back on track. Yes, it may take you time to rebuild your credit, but at least you will be on the path to recovery. The longer you ignore your debt problem, the longer you postpone the road to recovery.
Do you have any additional points that someone should consider pertaining to declaring bankruptcy?
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