Debt that Won't Die: When to Use Bankruptcy to Start Over

How do you know when to use bankruptcy to start over?  Bankruptcy is a last resort for most people, but it’s sometimes the only way out of a no-win situation.  After all, life happens and unforeseen circumstances such as illness, job loss or divorce can take a toll on your finances.  Even people who carefully monitor their earnings and spending can be unexpectedly hit by financial hardship.  Before you decide to file, think carefully about your situation and the steps that will lead you to financial freedom.

Steps to Take Before Filing Bankruptcy

• Step 1. Take fiscal responsibility.  Create a monthly budget and stick to it!  Think realistically about your non-negotiable expenses, like housing and auto payments.  Then, calculate how much it would take to actually pay off other debt, like credit cards, in about three years.  Figure out how much you need to spend each month for these expenses, and don’t forget to also include an emergency savings plan in your estimate.  

• Step 2. Contact Consumer Credit Counselors (CCC).  If most of your burden is credit card debt, then these experts may be able to help you negotiate a payment plan with your creditors.  In some instances, CCC may be able to help you get either a reduced or even 0% interest rate on your debt. Creditors typically stop collection actions against people who work with organizations like CCC.  

• Step 3. If neither of these options will work to pull you out from under the weight of debt, and if you’re unable to both pay your bills and maintain the most basic necessities like food and shelter, then it’s probably time to consider filing bankruptcy.  It might also be the best option if you’re older, have dependents, and have large debt and little cash.  Although you may feel embarrassed or guilty about having to go this route, you may need to use bankruptcy as a way to start over.  If you do file, keep in mind that:

• it will take about six years for your FICO score to recover;
• the bankruptcy will remain on your credit report for 10 years; and
• you can’t file bankruptcy again for about seven years.

If you decide that bankruptcy is your best answer, be sure to learn from the experience and work hard to avoid the pitfall of filing a second time.  Pay all of your bills on time, re-establish your credit with either a secured credit card or a department store account, and open a savings account that you can borrow against in the event of an emergency with the promise to pay yourself back those funds.  Ultimately, with time, effort and good spending habits, you’ll be able to reinvent yourself financially.

Getting Help

Before filing bankruptcy, it is also important to speak with an experienced bankruptcy attorney. He can provide you with details about what affect bankruptcy will have on your situation and whether or not it is a viable option for eliminating or restructuring your debt.