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When Is Bankruptcy A Good Idea?

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Last Updated on December 12, 2020 by Corinne Schmitt

Usually when I talk about money matters, I discuss saving and smart spending. However, the housing market crisis proved that for many people it’s a challenge just to pay the bills. With so many families in financial distress, I thought it would be helpful to discuss your options if you’re faced with a high debt burden.

First, I’d like to emphasize that though some individuals end up in financial trouble due to poor decisions, a lot of people find themselves struggling to make ends meet through no fault of their own. According to medical bankruptcy statistics, over half of individuals who file for bankruptcy cite overwhelming medical bills as their reason for doing so.

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Benefits of Bankruptcy

When you are facing exorbitant bills, bankruptcy can be a very attractive option.

If you are able to file for Chapter 7 bankruptcy, most of your debts will be cancelled.

If you aren’t eligible for Chapter 7, you may qualify for Chapter 13 bankruptcy. If you file for Chapter 13 bankruptcy, you are still responsible for paying off your debt but you work out a reasonable payment plan for doing so and some of your unsecured debts MAY be reduced.

In either case, creditors will be forbidden from contacting or threatening you.


Negative Effects of Bankruptcy

The obvious negative side effect of bankruptcy is the hit your credit will take. Bankruptcy filings remain on your credit report for seven to 10 years.

Depending on the state where you live, you could lose your equity in your home and/or your car if you file bankruptcy.

As a result of the poor credit score caused by bankruptcy, it will be difficult, if not impossible, to get new loans. In the rare events that you are able to secure a loan, you can expect to pay high interest on it.

One unexpected side effect is that you may have difficulty getting a new job. Many employers now run credit and background checks on employees. Even if you’re a strong candidate for a job, the black mark that bankruptcy leaves on your profile may be enough to nudge someone else ahead of you for consideration.

Employers aren’t the only ones who like to run credit checks. Most landlords run credit checks on prospective tenants. With a bankruptcy on your credit, it may be difficult to convince a landlord that you can be counted on to pay the rent.


Who Should File Bankruptcy?

The really young:  Since it takes up to 10 years to restore credit after a bankruptcy, the younger you are the more you have time on your side. Those who are further along in life will have a home, a car, retirement savings, and perhaps college savings for their children that they will want to acquire or protect.

Low wage-earners:  If you earn below-average income and are having a hard time paying for everyday living expenses, it may be difficult to set aside anything extra to pay down your debt. Bankruptcy would give you a fresh start so you can manage your regular bills without the burden of debt weighing you down further.


Alternatives to Bankruptcy

Negotiate with your creditors. If you are overwhelmed by your bills, contact your creditors and let them know that you are committed to paying off your debt and ask them to work with you to either reduce the amount owed or to lower the interest rate to make it easier to pay off the debt sooner.

Obtain a debt consolidation loan. If you have a lot of equity in your home, you may qualify for a consolidation loan. The benefits of a consolidation loan are that you will only have to make one payment each month (since you would use the loan to pay off all of your creditors) and the loan will most likely be at a lower interest rate than what you are currently being charged.

Consult a credit counseling agency. If you don’t want to contact your creditors yourself, you can seek help from a credit counseling agency. The agency will contact them on your behalf and will also help you establish a budget and payment plan. Search for “credit counseling and debtor education” in your state to find an agency near you.


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