Monday, April 11, 2011 | 2 Comments
I am strictly against declaring bankruptcy. But a time comes in consumers’ lives that they have no choice but to go bankrupt. If you are one of them and are reaching the end of your rope, don’t try to hold on. Save what you can. A bankruptcy is always done in a courthouse in front of the judge and before a whole lot of other people, strangers and acquaintances alike.
Bankruptcy is extremely painful and humiliating – or at least it used to be – even to consider bankruptcy, let alone join that crowd in the courthouse corridor, waiting for your name to be called.
Should You File Bankruptcy?
There is no magic formula for deciding when bankruptcy is the right choice. It’s an option you might consider if you:
- Are paying only minimum amounts on your bills
- Can’t budget yourself out of debt within five years
- Are getting notices that your mortgage or loans are being foreclosed
- Have had a severe financial setback, such as losing your job or a major client, a divorce or a costly illness
Alternatives to Bankruptcy
These alternatives include:
- Try to negotiate with creditors to reduce monthly payments or to skip some payments
- Get help from a nonprofit credit counseling group
A better approach would have been to cut spending and repay your consumer debt. But that’s not always possible, especially with such lousy economic circumstances hanging over our heads – our home, job and health insurance.
Take a good, hard look at your finances – your assets and liabilities. You struggle and keep struggling, sometimes longer than you should. A time comes that you just see darkness and nothing else – no light, nothing – at the end of the tunnel.
Your family depends on you. By the time you give in, you have lost assets you could have used to start over again. That defeats the point of bankruptcy – to stop the self-blame and hopelessness that goes with bad luck and bad bills, and give yourself a second chance.
When is the right time to go bankrupt?
When you are financially stuck but still have assets to protect. You can use Chapter 7, otherwise known as liquidation, the most popular type, only once in eight years, so draw up an extremely serious plan for living on your income when you are finally clear.
Your retirement account is protected
If you can help it, never tap your retirement accounts to make minimum payments on monstrous bills. IRAs and 401(k)s are largely protected in bankruptcy, as is most of your child’s 529 college-savings account.
Retirement money is your future. Don’t play with your future. Leave it alone and use credit cards for your necessities. Card issuers know that some of their customers will fail. That’s why they charge such exorbitant fees.
Your health is your future
Your health is your future too. You are doing your family no favors by forgoing medical treatment because you cannot pay. Bankruptcy eliminates medical as well as consumer debt.
Your mortgage is underwater
When you declare bankruptcy, it can actually help you save your home, especially with home values down and so many mortgages underwater.
If the house is worth less than the mortgage plus your home-equity exemption, you can file for Chapter 7 bankruptcy, wipe out your consumer debts and still keep your home, provided that your mortgage payments are up to date.
If your house is worth more than the mortgage, however, or you are behind on your payments, it will likely be sold by the court.
You are behind on the mortgage
When you are behind on the mortgage but have a new job with money coming in, choose a Chapter 13 workout. Your lawyer will negotiate a three- to five-year plan for paying your debts, including the mortgage arrears.
Some people stay in the plan just long enough to get current on their mortgage and then resume their normal lives.
Don’t try to preserve your house if you are going broke. Stop making payments, stay there while foreclosure is underway, then move out and rent.
Consequences of Bankruptcy
A debtor may not be fired from a job because of filing for bankruptcy. However, creditors may take a past bankruptcy into consideration when deciding whether to extend credit.
Many creditors regard a person who has filed for bankruptcy to be a higher credit risk and may either refuse to extend credit or only extend credit on less favorable terms.
Bankruptcy does not get rid of all debts
Among those excluded are:
- Child support
- Recent back taxes
- Student loans
- Recent large purchases
- Fines or penalties of government agencies
- Fraudulent debts
In a Nutshell
Foreclosures stay on your record for 7 years and bankruptcies for 10. If you re-establish good bill-paying habits, you may get decent credit even sooner and you will start fresh.