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The Only 3 Times Filing Bankruptcy Is Worth It

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Facing financial trouble, there are only three times when it makes sense to file bankruptcy.  None of them is labeled “last resort”.

Yet financial-advice gurus keep saying, bankruptcy should be your last resort.

That kind of thinking keeps people suffering too long, risking worse than financial embarrassment, and wasting money when repayment is a lost cause.

Putting emotions to the side, let’s walk through those three situations when filing bankruptcy is justified.

1.  You have a crisis

Foreclosure, repossession, or wage garnishment threaten the foundation of your finances.  Without a house, a car, and a paycheck, not much about day-to-day life is manageable.

Bankruptcy is may allow you to keep something that you would otherwise lose to creditors without bankruptcy.

Bankruptcy provides the “time-out” that stops all collection action.

The automatic stay triggered by filing bankruptcy has the force of law to make everyone stop in their tracks and move the action to bankruptcy court.

Sometimes, just getting served with a collection lawsuit seems like a crisis.  A lawsuit, after all,  is the precursor to a judgment that leads to garnishment, liens, or levies on your assets.

Service of the complaint isn’t really a crisis, but it’s a wake-up call that trouble looms ahead.

Usually, actually getting sued is often just a symptom of a much larger problem:  it’s not just the creditor who filed this suit, but the bunch of  other creditors who aren’t getting paid either.

Bankruptcy gets you a moment to consider the big picture, and provides the legal forgiveness of most unsecured debts.  It’s the long term effect of the discharge that is precious.

2.  You see the big picture

It doesn’t require a crisis to look at your balance sheet and realize you can’t dig your way out of a financial hole.

A lifetime of minimum payments on suffocating debt is no life.  Keep making minimum payments and the debt doesn’t even die of old age, because payments extend the statute of limitations.

Healthy finances include a reserve for emergencies and serious savings for your old age.  Keep feeding VISA and AMEX and you’ll be eating cat food at 70.

Bankruptcy exists because lawmakers understood that the economy is better off when people aren’t driven into the economic underground, and when families have the chance to be self sufficient.

It doesn’t matter how got you into debt: most bankruptcies result from events the individual didn’t control, like job loss, illness, or divorce.

Whether you’re in financial trouble because of bad luck or bad judgment, a fresh financial start is energizing.

3.  You’re worrying yourself sick

How we feel about owing money has a huge impact on physical and mental health.

It’s unfortunate in a way that our societal tendency to lionize those who doggedly pay off their debts:  the heroic story of slaying debts blinds us to the fact that stress kills.

True story of retired couple who made wrong choices about who to pay

And stress makes us stupid:  actually, measurably less likely to make good decisions going forward.  Collection pressures force too many folks make foolish choices about which creditor to pay.

So, when money worries interfere with sleep, digestion, work or relationships, it’s worth considering whether a bankruptcy discharge would improve the situation.

Even elders and the disabled, who are often legally protected from collection by non bankruptcy laws, decide to discharge debts so the bills are gone legally, for all time. And they enjoy peace at home.

Reasons to file overlap

These three reasons for filing bankruptcy aren’t mutually exclusive:  you can have a crisis and see the big picture.

But the idea that bankruptcy is only a last resort, when you’ve exhausted all other avenues, is just flat wrong.

Bankruptcy should not be taken lightly, but neither should it be the last option.

The sooner you look at the big picture provided by bankruptcy, the less likely you are to waste money trying to pay impossible debts or make catastrophic decisions like invading retirement or borrowing against your house to pay dischargeable debts.

More

Does debt settlement work?

The real causes of bankruptcy

Why bankruptcy seems scary

Debt Settlement Is A Dud

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debt settlementMaking a deal with your creditors has enormous appeal when there isn’t enough money to pay what you owe.

Their pitch for “settling your debts” touches a nerve.  Almost everyone WANTS to pay their debts.

But the truth is :  Debt settlement companies rarely deliver what they promise.

Their pitch shouts that debt settlement is superior to bankruptcy.

It just ain’t so.

All too often, the client of the debt settlement company is exposed to continuing collection calls, lawsuits, plumeting credit scores, and garnishments while the company is attempting to settle the debt.

And in the end, many dollars later,  debt settlement delivers neither a debt free life nor an undamaged credit report.

The appeal of debt settlement

What is it that makes a chancy, drawn out, expensive relationship with one of these debt settlement companies seem attractive to the financially overwhelmed?

I’d suggest:

  • Enrollment  appears to offload the problem on someone working for you
  • High profile media types like Suze Orman and Dave Ramsey badmouth bankruptcy
  • Promoters suggest that there is a “secret” to settling your debt for pennies on the dollar
  • Paying some part of debt is morally satisfying

As long as the public buys the idea that bankruptcy is akin to leprosy, those who, for a fee, offer the secret, non bankruptcy solution get rich.

Settlement company gets theirs first

The truth is that most debt settlement companies get their money upfront.  The first several months of payments don’t go to creditors or to building a settlement kitty, they go to the debt settlement company.

When the consumer figures out that paying the debt settlement people for months on end has not resolved any of the life-sapping incidents that come with being in debt: collection calls, law suits, levies, the debt settlement folks can move on to the next troubled consumer, with money in their pocket.

Bankruptcy works

By contrast, bankruptcy is available for a flat filing fee of around $300 to the court, plus attorneys fees.

It costs the same whether you have modest debt or huge debt.

It is instantly effective to stop collections.

Creditors can’t opt out, like they can with debt settlement.  All creditors are bound by the automatic stay and ultimately by the discharge.

And, the rules are enforced by a judge, with powers of sanctions and even incarceration.

What a bankruptcy judge does

The cherry on the top is that bankruptcy doesn’t generate cancellation of debt income issues.  There are no negative tax consequences from discharging  debt in bankruptcy.

The long-term tax advantage for homeowners in bankruptcy over debt settlement

Bankruptcy bashes debt, for certain and for all time.

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Pay off credit cards with no interest

Make no changes til you see a bankruptcy lawyer

What to ask a bankruptcy lawyer before signing up

Image courtesy of derekbruff.

Credit Reports Heal

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band-24298_1280 (1)_optWill filing bankruptcy hurt my credit? Probably.

Should that hit to your credit keep from filing bankruptcy?  Not by a long shot.

Incredibly, I encounter people drowning in debt who think their credit report is more important than their financial health.

Their thinking seems to be that credit, once damaged, is never the same.

It’s not so.

A blow to your credit is not permanent nor even long lasting.

Your “credit”, or really, your worthiness for new credit, is almost a living, breathing thing.  It can suffer a blow and recover.

Credit hit is like a cut

Whether you choose debt settlement, debt management or bankruptcy, the solution will damage your credit, in the short run.

Think of the damage like a wound.

The wound bleeds, it exposes the rest of your body to infection.  It hurts.

Think of bankruptcy as antiseptic.  Douse the wound with antiseptic to kill infection and promote healing and it hurts…but the hurt fades.

Over time, the wound closes and scabs over.  It isn’t painful most of the time.

When it’s healed, there’s a bit of a scar.

Over time, even the scar fades.

Debt is chronic disease

When your debts are beyond paying off in the normal course, it’s like a disease you can’t beat.  Persistent symptoms, sometimes progressively worse, other times just ever-present.

Debt saps your energy, consumes your thinking and limits your opportunities.

If your debts are such that you’ve considered bankruptcy, your credit worthiness is probably already compromised.  Would any creditor lend you more money at a reasonable rate?

If not, your credit may not be doing you any good at present.

Your balance sheet is what counts

A credit report is a limited history.  As time passes, the oldest history falls off the report to be replaced with the snapshot of today’s finances.

If you use bankruptcy to wipe away your old debts, your balance sheet (assets minus liabilities) improves on the spot.

The bankruptcy filing shows on your credit report, in the rear view mirror, for some time.  But its significance to lenders fades the farther down the road you get from filing.

But with your old debts gone, even right after you file, you no long look like someone who already has as much debt as they can handle  or more.

Take steps to get financially healthy and your credit will recover too.

Image courtesy of Flickr and RambergMedia Images under a Creative Commons license.

What Everyone Knows About Bankruptcy: Not

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torture deviceOther professionals should know better than to advise people about the workings of bankruptcy.

And if they don’t know better, they should be made to pay, in some exquisitely painful way, for the harm they inflict.

The rack seems good to me.

The terrified client in my office was told by her accountant that if she filed Chapter 13 to save her home, the court would not allow her to buy prescription dog food for an ailing 16 year old pet!

Further, the accountant went on to declare that in Chapter 13, the debtor could pay only for housing, food and gas: nothing more. No maintenance for the house, no insurance, no clothes, no medical care.

Of course, the accountant was dead wrong. Articulate but wrong. [Read more…]

Surefire Steps To Avoid Bankruptcy

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Naked_Hike-wikimedia-ebdow-cropped

Most people would rather parade naked down Main Street than file bankruptcy.

Bankruptcy makes them feel exposed, defeated, ashamed.

If you don’t want to go there, you can order your life so you don’t ever need bankruptcy relief from debts you can’t pay.

I’ve figured out the formula that assures that you’ll never met me in my professional capacity.

My five easy steps to avoid bankruptcy [Read more…]

What Game Are We Scoring?

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score card flickr yoppyGetting credit after bankruptcy is the most frequent search term that bring visitors to Bankruptcy in Brief, my encyclopedic sister site on bankruptcy.

In these visitors’ minds, their credit score is a central concern.

It’s ironic that readers, saddled with enough debt to consider bankruptcy, ask about the impact of a bankruptcy on their credit score.

It’s the same face to face. …often in the first 5 minutes of our meeting.

Others  proudly tell me that they have “perfect credit”: that translates as “never having missed a minimum payment.”

Some follow with a declaration that they won’t file bankruptcy if it will hurt their credit score.

Huh?

What they miss in their decision making process is that they can never pay off the credit they have! And their first concern seems to be how soon they can get back into the credit market.

Hype about credit scores

Identity theft and the misuse of credit scores for employment and insurance purposes have heightened our awareness of credit reports and credit scores.

This legitimate concern is hyped by those who, having created the credit scoring “game” and cemented their lock on the rules of the game, then want to sell us services to protect us from damage to our scores.

What most consumers don’t understand is that credit scoring is a purely arbitrary analysis. The rules are controlled by each score provider.  They can change without notice or review.

Credit scoring is not regulated, objective, or transparent. It seems your score can suffer from having too much credit, too little credit, or even for astutely shopping for better interest rates on purchases.

Refocus on net worth

Let’s focus on our personal balance sheet, rather than our ability to acquire more debt, as a salutary exercise.

Let’s look at our savings, our preparation for retirement, the adequacy of our insurance protection as the measure of our financial health.

Let’s ask ourselves first how long it will take us to repay the debt we already have . What would we save if we weren’t paying interest on credit card debt?

Let’s learn to find our self worth in something other than the kind of credit card we carry or the credit score someone else assigns us

Image courtesy of Flickr and Yoppy.

Four Factors Drive The Cost Of Bankruptcy

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When you’re flat broke and thinking about bankruptcy, cheaper sure looks better.

If a lawyer will do your Chapter 7 for $600, what’s the point of paying $1000? Or even $2000?

Like answers to many legal questions, it depends.

Bankruptcy relief depends on your facts

Whether to file bankruptcy, or whether to file now, rather than later, depends on how the facts of your financial situation interact with bankruptcy law.

Your bankruptcy lawyer is charged with gathering those facts and analyzing them so that you get the most debt relief the system can offer.

If your bankruptcy lawyer doesn’t dig deep enough, or think broadly enough, you may hit avoidable snags in your case.

With the caveat that there is no direct and sure-fire connection between cost and quality, let’s talk about what it costs to escape from broke. [Read more…]

Is There Life After Bankruptcy?

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multiple questions-grisel d'an flicker_opt

Is bankruptcy worth it?

Those who see the decision to file bankruptcy to get a fresh start as painful or less than honorable wonder what life is like, on the other side of bankruptcy.

I got a report from the other side this week from a Chapter 7 client from 3 years ago.

Single, well past middle age, a renter, and dead broke when she’d filed, she’d retired, moved, and bought a house!

Her email was entitled:  “A Happy Ending”. [Read more…]

Living With Debt: Better Than Bankruptcy?

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living in debt

 

Locked up in debt?

What are your choices?

Is it better to live with your debt and keep making minimum payments?

Or, is life worse if you file bankruptcy?

That question sums up most people’s fears about shedding their debt through bankruptcy.

What will life be like, after bankruptcy?

Good questions.  And I applaud people who realize that debt and debt relief each have future consequences.  I’ve talked about it before.

Clients fear the “bankruptcy unknown”, closing their eyes to the precariousness of their current situation as though doing nothing is a worthy choice.

But let’s turn the question around:  what will life be like if you continue on as you’re doing now?

Life in debt

Servicing debt from the past cuts down your future options.  Your paycheck is already committed before it hits the bank.

Whether it’s payday loans or credit cards for this month’s necessities, you’re locked in.

A slight bump in the road, and you’re really in the soup.  Most Americans say they couldn’t handle a $500 emergency without borrowing.

But absolutely most compelling for me, you’re probably making no provisions for your old age.

Lots of folk tell me they don’t think they’ll ever retire. Some say it because they enjoy work;  most say it because they can’t make ends meet without a job.

But they will get old, working or not.  The job choices will contract, and their ability to be productive will diminish.  I see it personally with the elders I’m caring for now;  they can’t handle the mental or the physical sides of a job.

Of course, the stress of being in debt may shorten your life.  Stress impairs your decision making.  That’s a terrible way to meet the challenges of funding your old age.

After bankruptcy

So, what if you broke out of debt by filing bankruptcy.  What happens in the real world?

Let’s list the negatives of filing for bankruptcy.

  • Credit in the immediate future is more expensive
  • Bankruptcy shows up on your credit report
  • If you are a renter, some landlords are uncomfortable
  • Some new employers are put off

These negatives fade in importance over time.

They need to be weighed against the equally real consequences of not solving a debt problem.

For most considering bankruptcy, their credit record is already blotched; a bankruptcy filing is not going to be the first adverse entry on their credit report.

Your credit heals over time

But credit scores, the predictive formula, rather than the history that’s a credit report, may improve instantly:  your debt to income ratio gets better.

Bankruptcy might be the first step to improved financial health.

Bankruptcy may even be a step in better physical health. Stress is a killer.

Bankruptcy enables saving.  You’ve proved you can live on what’s left after minimum payments.

Use that same discipline to set money aside for the unexpected, and for the inevitable old age.

Live long and prosper.

More

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What you need to ask a bankruptcy lawyer

What should bankruptcy cost

Bankruptcy terms, simplified

Stupid Moves Before Seeing A Bankruptcy Lawyer

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before bankruptcy

Don’t tidy up your financial affairs before consulting a bankruptcy lawyer.

You may waste money or lose bankruptcy options when you make last minute changes to your situation.

You’ll have the widest set of options for a fresh start if your lawyer sees the situation as it is today.

What looks to you like complexity and disorder may look to your bankruptcy lawyer as opportunity and advantage.

The high cost of financial housecleaning

My heart sinks when a new client tells me that they’ve just paid off the loan their parents made them before seeing me.

Or borrowed against their retirement to fund debt management.

Or paid off the taxes so that all the remaining debt is credit cards.

For different reasons in each instance, those actions complicate a bankruptcy or squander assets that could have been saved in bankruptcy. [Read more…]

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Phone: (650) 694-4700

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