Is Bankruptcy the Right Choice?

It's the choice that no one really wants to make, but when debt starts to seem beyond any ability to pay, and creditors demand repayment, it may seem like the only option is bankruptcy. There can be other choices to consider in that time, meanwhile, and while everyone thinking about bankruptcy should consider the advice of a qualified attorney, it's still an option that's available.

Since each case is different—current conditions, reasons for large outstanding debt, late payments, or outright delinquent payments—it's easy to wonder if, in the end, bankruptcy is the option that's right for me. There are some simple points that can help make that decision.

Step 1:

First, find out if you're even allowed to file for bankruptcy. Some breeds of bankruptcy filing require what's called a “means test,” in which it's determined if you have the ability to pay back creditors. For those who make less than a state's median income, bankruptcy should be an option. For those who are at median, or exceed it, at least some of the debt will have to be paid back.

Step 2:

Second, consider the immediate future. Is something going to happen to change your life in the near term? Maybe you're about to get hired somewhere that offers better pay, or for the unemployed, paid at all. Maybe there's a gift coming your way, or a trust fund about to be unlocked, or even an inheritance in the future. It may be that the circumstances causing those late and delinquent payments are about to be reversed, bankruptcy may not even be a problem.

Step 3:

Third, consider the debt involved. If it's a mortgage or a car loan, it's called “secured debt,” while if it's medical bills or credit card payments, it's called “unsecured debt.” Secured debt is generally anything backed up with a kind of collateral, like a house or car, and secured debt often survives many bankruptcy proceedings. Even some unsecured debts like student loans or some legal fees can endure after bankruptcy, so it's worth factoring in what kind of debt is involved.

Step 4:

Fourth, consider if you're ready for the inevitable downside. A bankruptcy notation will appear on a credit report, and remain so for as long as 10 years. That can impact the ability to find loans in the future, and even hurt an ability to get a credit card. There are even some emotional points to consider; some wouldn't be able to live with the guilt that often comes with “walking away” from debt, let alone “being bankrupt,” a status that often brings to mind images of crushing poverty.

Step 5:

Finally, consider if there are any other options. If someone owed you several thousand dollars, and said that they couldn't pay, what would be your response? Threats of lawyers and prison? Forget the debt entirely? Or would you try to work out an arrangement with that person so you get back at least some of the money that's owed to you? You'd probably try to work it out, and many common creditors feel the same way. With some good communication, you may not need bankruptcy at all. Consider asking about longer-term plans, or reducing or even waiving interest or other penalties that might make a debt seem beyond paying back.

If you're considering bankruptcy, it's the kind of thing that has to be considered carefully. There's a lot that goes into such a decision, and sometimes, it may not even be necessary.  Going into bankruptcy with a clear head and a full understanding of the issues involved will help make sure you make the best choice you can.