When Bankruptcy Is Not the Right Option
Filing for bankruptcy may seem like the answer to someone who is struggling to keep up with debts. Bankruptcy is a serious matter which should never be undertaken without serious consideration. This course of action, in essence, involves voluntarily encumbering yourself with a public record, which is the equivalent of a court judgment. This can come up in future background checks, in addition to being placed on your credit report, where it remains for ten years. While bankruptcy may be tempting in the midst of present hardships, it should only be a last resort when all other options have been exhausted.
If you are not prepared for the long-term consequences of filing for bankruptcy, you should try to find another option. Your current situation may be unpleasant, but these consequences can be even more so. Having a bankruptcy on your record brings numerous long-term consequences. Many job and rental applications ask if you have ever filed bankruptcy.
This can make it harder to find a job or a rental home. Bankruptcy can prevent you from buying a home for at least two years and as long as ten. It puts a big black mark on your credit, which can cause you to have higher monthly bills, including insurance premiums and interest on future credit cards and loans. Bankruptcy can also trigger utility companies to require deposits, sometimes large, when you move.
Bankruptcy is usually not the right option if you still have other avenues to try. Current bankruptcy laws now require credit counseling prior to filing for bankruptcy. The purpose is to help you learn about alternatives. Reputable credit counseling companies can often negotiate with creditors to lower your payments, making your debt load more bearable and allowing you to pay them off sooner. Alternatively, you could try negotiating with creditors yourself, but this can be difficult and much less effective.
If you or your spouse is able to take on an extra job temporarily to pay down the debt, this would be a much better option than bankruptcy. If you are able to obtain a low-interest loan from a reputable lender or from friends or family members, this could allow you to pay off your debts and result in one low payment. If you own a home with equity, you might consider a loan against your house, although this should be done with caution. All of these options may be uncomfortable in the short-term, but will have much better effects in the long run.
Bankruptcy is not the right option when most of your debt consists of student loans or IRS debt. Federal tax debts less than three years old are not dischargeable in bankruptcy, and student loans of any age usually cannot be discharged. In these cases, bankruptcy will not provide the desired relief, but it will have negative long-term consequences.
Bankruptcy may not be the right choice if the reason for your troubles is that your spending is out of control or you are living beyond your means. If this is the case, you may be able to solve your debt and cash flow problems simply by forming a budget and sticking to it. Credit counselors often help with this free of charge. You may have to consider selling your house and buying something less expensive, or renting a cheaper home.
If you have a high car payment, you may need to try to find something less expensive. If you are in the habit of living beyond your means, you are at a high risk for rapidly accumulating debt after bankruptcy and finding yourself in a worse position. You may only file a Chapter 7 bankruptcy once every six years. If you accumulate excessive debt soon after filing, you will be stuck with it, and rebuilding credit will be more difficult and take longer.
If you have fair to good credit, bankruptcy may not be the best choice. Bankruptcy will reduce your score to a poor level, usually well below 600. Taking whatever measures are necessary to pay down your debt will free up cash flow and improve your credit. Re-establishing credit after bankruptcy can be expensive, and it takes a long time.
If you have a lot of assets, bankruptcy could be a very bad idea. The bankruptcy trustee could seize your assets, sell them off, and distribute the proceeds to your creditors. Federal bankruptcy laws do exempt certain assets, and many states have exemptions as well, which you could choose over the federal exemptions.
These exemptions limit you to the property you need for your home and to operate your farm or business, but usually don’t allow for much else. They place limits on the value of your motor vehicles. If you have an expensive car, you may have to give it up in a bankruptcy. You might be better off selling it without filing for bankruptcy, and using the money to pay creditors yourself.
If your debt is primarily credit card debt, and you have made large purchases or taken out cash advances within the last 90 days, the courts could consider this fraudulent spending, and your creditors may be able to keep these debts from being discharged. At the very least, you should defer your decision to file bankruptcy if you are in this situation. Also, if you are expecting a large tax return, you may want to defer your decision until after you have received it and used it for routine expenses. The trustee can seize this. Perhaps you could use your tax return to pay down debt and lower monthly payments instead.
If your income is above average for your area, you may not be allowed to file a Chapter 7 bankruptcy. A Chapter 13 bankruptcy may be your only option. This type of bankruptcy requires you to pay back your debts, in a payment plam the court decides you can afford, over a longer period of time. It also puts a black mark on your credit. If you can find a way to pay your debts without this option, you will be better off.
If you are not absolutely drowning in debt with no hope of ever paying it off, thoughts of filing bankruptcy should be placed on the backburner. While there may be times when bankruptcy is the best option, it usually is not. The long-term consequences can be quite unpleasant, and usually, much better options are available.