In his blog post last week, Michael Smith wrote about a woman who was able to overcome tens of thousands of dollars in medical debt by giving up a variety of comforts, working a second job, and even having her friends host a local fund raiser on her behalf. When Michael last spoke to her, she was only 3 months away from paying off all the debt. This is a truly inspiring story about what can be achieved through sheer willpower and determination.
However, her choice isn’t necessarily the right one for everyone. Bankruptcy has helped many people to keep their home from foreclosure, relieve stress, and provide the fresh start they really need to get back on their financial feet. So if you find yourself unable to pay your bills and considering bankruptcy, here are some guidelines to keep in mind:
Ask yourself how you feel about bankruptcy. For this woman, the decision to file for bankruptcy wasn’t just a financial and legal one but an ethical one as well. She felt she legitimately owed the debt and was morally obligated to pay it back in full. On the other hand, you to balance your obligation to your creditors with your other responsibilities. For example, the money that went to pay down her debt could have been used to provide a more secure future for her family. She also had to take time away from her loved ones to work that second job. Finally, keep in mind that many lenders loan money with the full understanding of the risk. In fact, most of them assume that a certain percentage of borrowers will default and factor that into their pricing. That’s one of the reasons that unsecured debt like credit card balances are typically at such a high rate of interest.
Exhaust your other options. Even if you’re comfortable with bankruptcy, it should be a last resort. Like the woman in the blog post, see if you can reduce your expenses or work a second job. If you’re still coming up short, let your creditors know you’re considering bankruptcy and they may be willing to work something out with you. After all, they’d probably rather get a partial payment than none at all. Another option is credit counseling, which is required before you can file for bankruptcy anyway.
Don’t tap protected assets if you’re considering bankruptcy. Assets that you can generally keep after bankruptcy include retirement accounts, 529 college savings plans, and a limited amount of home equity and savings. You don’t want to raid a retirement account or take out a home equity loan to pay down debt that will just end up being discharged in bankruptcy. Filing for bankruptcy is no fun but it’s even less fun when you’re bankrupt with no retirement savings and a second mortgage payment.
Do tap non-protected assets. See if you have assets like investments in non-retirement accounts or a second home or vehicle that you can sell to satisfy your debts. If so, you’re likely to lose them in bankruptcy so you might as well sell them now and try to avoid the hit to your credit that a bankruptcy would cause.
Prioritize your mortgage payments. Bankruptcy may be able to save your home but only if your mortgage payments are up-to-date.
Make sure you don’t anticipate needing credit or a new job anytime soon. A bankruptcy will stay on your credit report for a decade and it could be difficult to get either of those things during that time, especially for the first few years. The good news is that most people’s credit scores been to recover after just a few months.
If you’re going to file, sooner is usually better than later. Unless you fit one of these rare circumstances where it makes more sense to delay, dealing with overwhelming debt can be like trying to pull off a band-aid. It’s better to just rip it off all at once rather than prolong the agony. The sooner you file, the sooner you can start rebuilding your finances and the sooner you’ll have the bankruptcy off your credit report.
Seek good legal advice. But before you do anything, be sure to consult a qualified bankruptcy attorney. If you don’t know one or anyone who can refer you to one, see if your local bar association has a lawyer referral service.
As with most financial issues, there are no easy answers. Each situation is different. Just be sure your decision is an educated one and perhaps you can live out your own inspirational story.