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Should You Declare Bankruptcy?

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Notice: Due to the complexity of bankruptcy law, and the difficulty of determining which form of bankruptcy will apply to any given situation, most people will benefit from consulting with a qualified bankruptcy lawyer before filing for bankruptcy.

What is bankruptcy?

Bankruptcy is a process by which a debtor can obtain court-ordered relief from his debts. While bankruptcy can be a valuable necessity in some cases, not everybody who faces financial difficulty should file for bankruptcy.

Should I declare bankruptcy?

There is no "quick and easy" answer to this question. You should discuss your situation with a credit counselor or a bankruptcy attorney, to evaluate the costs and benefits of bankruptcy given your personal financial situation.

Not every debtor qualfies to file for Chapter 7 bankruptcy. A means test is applied to determine if you will be able to repay a substantial percentage of your debt, and if you are determined able to do so you will be ineligible for a liquidation of your debts and will likely have to engage in a repayment plan as part of a Chapter 13 bankruptcy.

The type of debt you owe can be a significant factor in whether you file for bankruptcy, as well as the form of bankruptcy you pursue. Factors which may affect your decision to file for bankruptcy protection are detailed in this associated article: Filing For Personal Bankruptcy Protection in a U.S. Court.

What are the alternatives to bankruptcy?

There are numerous alternatives to filing bankruptcy. Determining which, if any, are appropriate for you depends in large part upon your personal financial situation. It is a good idea to seek financial counseling prior to making a decision as to whether to file bankruptcy, or regarding which alternatives may work for you. Possible alternatives include:

Financial Management

While it means giving up a great deal of control, you may wish to utilize a financial manager to pay your bills, and to put you on an "allowance," until your finances are back in order. This can be particularly helpful if your financial problems emerge from bad spending habits. You may also wish for a less intrusive form of management, such as simply having a financial counselor help you create a budget.

Choose your financial counselor carefully, as there are many self-professed counselors who will charge high fees and whose services may be of little value. Consider utilizing a non-profit financial counseling service.

"Working Out" Your Debts

Some creditors will work with debtors, even waiving part of a delinquency or waiving interests on a debt, provided the debtor agrees to make payments on the debt. Sophisticated creditors know that some debts can be hard to collect, even if you don't declare bankruptcy. Collection agencies often take a percentage of the debt they collect as payment, litigation can be timely and expensive, and forcing a bankruptcy may result in an even smaller recovery.

Refinancing

If you own a home, and have some equity in the home, consider refinancing your home to pay off all of your high interest debt. You may be able to obtain long-term financing at a much lower interest rate, allowing you to consolidate your debts, lower your monthly payments, and obtain a tax deduction in the process.

Please be careful when dealing with companies which offer to combine all of your debts into a single "low payment" loan. Some of those companies collect large fees while offering a loan package that is inferior to that which you could obtain through a bank or credit union. A poorly structured loan may leave you paying interest for years, while making essentially no progress on paying down the principal of the loan.

Avoiding Credit Repair Scams

Whether before or after bankruptcy, many people are attracted to offers to "repair bad credit" or even to "remove" a bankruptcy from their credit history. Most such offers are fraudulent. Readers may wish to consult this article about credit repair scams.