Chapter 7, 13 or non-bankruptcy option?
Deciding to file bankruptcy can be a tough decision.
Almost everyone I talk to has struggled to avoid filing, and hoped against hope that “something would change for the better” so that their financial troubles would disappear.
For most, the hardest thing to do is make the decision to come in to see me for a free, no-obligation appointment to find out what your options are.
Can you avoid bankruptcy on your own? To explore non-bankruptcy alternatives, create a budget for your realistic current living monthly expenditures. Include mortgage and car payments, but exclude all other existing debt payment.
With the money available each month after paying your current living expenses, can you pay off your existing debts at the current interest rates in 3 years? If not, can you:
- Reduce expenses,
- Increase income, or
- Sell assets to make that possible?
Avoid resorting to liquidating IRA’s or 401K plans to pay creditors as these assets are generally protected from collection actions by creditors. They 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 creditor in place of your existing creditors. While you can discharge most debts in bankruptcy, you cannot usually discharge taxes.
Can you avoid bankruptcy with outside help? If you can’t pay off your debt within three years on the present terms, you could contact one of many debt counseling services; they might be sble to 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 sometimes cease collection actions against those participating in CCC plans, sometimes they do not and CCC can’t stop lawsuits, garnishments, or bank account attachments.
These plans usually work best when the debt is primarily credit card debt, and when the debt is not too large.
Warning: 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 back support go unpaid. That approach seldom gets the debtor the relief needed. What is worse; if you have tax debt you should generally speak to a tax/bankruptcy lawyer. The money you do pay should count! I.e. be used to pay non- dischargeable tax debt. I can answer these questions for you at your consultation.
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. The best way to find out is to speak to a bankruptcy specialist.
In general, the older you are, the greater the number of people dependent on your income; the larger your debt; the smaller your cash reserves or retirement savings; and the greater the amount of non-dischargeable debt, the more likely that bankruptcy is appropriate for you.
On the other hand, if your financial situation causes such stress that it interferes with your ability to work, parent, or sleep; perhaps you should consider bankruptcy as appropriate for your mental health rather than financial necessity. Non-financial problems are just as real as money troubles, and I have seen too many people get divorced, or begin to abuse drugs and alcohol as an escape from financial pressure, when all they really needed to do was to get a grip on their finances. Sometimes a bankruptcy filing fixes more than just financial problems.