Most people go into debt fully intending to pay it off. However, job loss, divorce, and medical emergencies can prevent even the best-intentioned from meeting their obligations. Unfortunately, embarrassed by their financial situation or feeling moral qualms about bankruptcy, many families struggle far longer than they should to pay down their mountain of debt.
If you find yourself in any of the following situations, you’re already in financial trouble and should consider bankruptcy as an option.
The point of bankruptcy is to stop the debt cycle and get a second chance, so the time to file is before you’ve lost everything.
You Can’t Afford Medical Care
Over half of all personal bankruptcies in the U.S. are due primarily to overwhelming medical bills. Surprisingly, three in four of these filings represented people who had medical insurance. If you delay or avoid medical treatment because you can’t afford it or are worried about insurance coverage gaps, you’re gambling with your future. Medical debt is eliminated in bankruptcy, so if you need treatment, get it. Going bankrupt is preferable to enduring a debilitating illness, or losing your life.
You Want to Save Your Home
Most states allow for a limited amount of home equity to be retained in Chapter 7 bankruptcy, so if your house is worth less than you owe, in most cases you can file for bankruptcy and keep your home. You generally need to stay current on your mortgage payments if you want to retain this option; if you’re behind on your mortgage or your house is worth more than you owe, foreclosure is more likely.
If you are behind on the mortgage but have reliable income, Chapter 13 bankruptcy may be the best choice for you. Chapter 13 allows you keep property that would otherwise be used to pay your creditors, and work out a plan to repay a portion of your debts over the next three to five years. When the plan is completed, the remainder of eligible unsecured debt is erased.
You Won’t Be Able to Pay Off Your Debts in Five Years or Less
You should always consult a financial adviser before filing bankruptcy. A professional can look at your financial situation and help you come up with a plan for reducing spending, maximizing income and assets, and paying down your debts. However, most experts recommend that if you cannot come up with a plan that significantly reduces the amount you owe within five years, you will probably be better off filing bankruptcy.
Negotiating Didn’t Work
You should always try negotiating with your creditors before filing for bankruptcy. Many will cut a deal with you; they want to be paid, after all, and if you declare bankruptcy, chances are they won’t see any of the money you owe. But if you’ve attempted to work out a payment plan with one or more major creditors and have been unable to come to any kind of agreement, you might be left with no other options. If your creditor demands full payment and isn’t willing to be paid over time, or at a reduced payment schedule, then bankruptcy is probably your best bet.
You’re Paying Off Credit Cards With Your IRA
Your savings represent your family’s future, and the good news is that IRAs, 401(k)s, and 529 college-savings accounts are largely protected in personal bankruptcy. It doesn’t make sense, therefore, to use them to pay down on consumer debt that could be eliminated if you file chapter 7. Most people don’t realize that if you take ten grand out of your retirement fund, it could cost you $100,000 or more in lost future income. Additionally, if you go through these savings and have to pay tax penalties on the withdrawals, you will build up even more debt. If you’re thinking about pulling from retirement funds to pay down credit card debt, that’s a sign that it’s time to talk to a bankruptcy lawyer.
The Bottom Line
Bankruptcies can remain on your credit history for up to ten years, and may initially make it more difficult and expensive for you to get credit. However, if you pay your remaining bills on time, you will start building your credit score back up. It’s entirely possible to improve your credit score after bankruptcy, particularly if your score was already dismal due to late payments and defaults.
So if your unsecured debt is more than your annual income, your mortgage is underwater, and you’re considering using retirement funds to pay credit card bills, it’s time to put aside your moral qualms and investigate the very real option of bankruptcy. Don’t let an outdated stigma keep you from giving yourself a fresh start.