Filing for bankruptcy is a daunting and stressful decision. In clients I see the stress continues to grow almost daily as debt increases, bills keep coming, and options seem limited. Unfortunately, bankruptcy can be very misunderstood and underused by the people who need it the most.
A Chapter 7 Bankruptcy is a complete discharge of all unsecured debt. An "unsecured" debt is any property you have which you have not put up as collateral. Debt that is put up as collateral is called "secured debt". The most common secured debt are car loans and home loans.
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Note, that the decision for filing a Chapter 13 bankruptcy (which is a repayment plan over a 3 to 5 year period), is not covered by this article, and timing issues are different.
There are three variables I use to determine when the right time to file for a Chapter 7 might be, and whether other options might be preferable.
1. Total Amount of Debt
For most people who are looking into a Chapter 7 bankruptcy, their income is either around zero, based on unemployment, or are under the average income but racking up debt.
The number I typically use is pretty easy, at around $10,000 in debt the benefits of a bankruptcy start to tip the scales away credit consolidation. For under $2,000 you can get rid of $10,000! That's essentially an $8,000 profit. A credit consolidator, even if they get you're the best deal possible will maybe cut your debt in half, with a 5-10% (and often higher) interest rate. Over the life of payment for most people qualifying for Chapter 7, you're not only going to stay in debt for several more years to pay off the $5,000, but the interest rates will result in you paying a few thousand dollars more. The net result is probably going to be a wash. But with Bankruptcy... you don't have to hassle with the bill and the danger of overage charges anymore.
For every dollar above $10,000 in debt, the benefits of bankruptcy improve over credit consolidation improve even more.
Unfortunately most credit consolidators will sell their services to anyone. Even those with ridiculously high degrees of debt will get locked into payment plans that are far below what bankruptcy could offer them. Not only that, but with the added payments, you may be ending up in bankruptcy anyway.
Again, if an individual would be looking at filing for a Chapter 13 because their income was too high, then a rato of debt to income would probably be more appropriate. But when dealing with Chapter 7 Clients, a hard line $10,000 is a good place to at least get yourself a plan to file.
2. Foreseen Medical Expenses
Many times I speak to people who are right in the middle of a healthcare battle who are worried about paying off their medical expenses with more to come. The difficulty of having to fight through cancer, or a stroke, or other serious medical condition is even worse when the bills start coming in.
If medical bills are still coming, its best to delay bankruptcy until all of the anticipated medical expenses are incurred. Since medical bills are unsecured debt, they can be completely discharge in a Chapter 7 bankruptcy.
However, you only qualify for bankruptcy once every seven years, so its best to get all your bills, and then file so you can discharge all the debt at once. It might be a little underhanded to some, but for those facing bankruptcy, survival often trumps the moral ramifications.
3. Dipping into Retirement Accounts
If anyone is thinking about using money from their retirement accounts to pay off debts, or have started to use retirement money already, then absent coming medical bills time to start a bankruptcy right away.
SAVE YOUR RETIREMENT ACCOUNTS. In both Chapter 7 and Chapter 13 the government completely protects retirement accounts including 401k accounts, IRA accounts, pensions, life insurance and certain annuities. The government wants you to retire on your own dime, not on government benefits, so hold onto them. Retirement accounts Even if medical bills are anticipated, its wise to save every dime of your retirement accounts no matter what.
Unfortunately, and all too often, clients find bankruptcy after they have already used their retirement money to pay off debt, and find themselves filing for bankruptcy anyways after the ever crushing amounts of medical expenses or credit card debt continues to pile in.
Tell your friends, tell your relatives. It might just save them their retirement.
Conclusion
Timing can be everything. It's best to find a good attorney who won't rush you through the process simply to make a sale. Unless, of course, you have some need to be rushed through into bankruptcy. Ask your friends or relatives whom they have used or heard of. You might be surprised at the number of people who file bankruptcy each year. People at every income level use bankruptcy when their costs exceed their income. Don't be ashamed, take charge, and fight your way through this very difficult time. Good things will come.
Is Bankruptcy Right For You? Talk to Bankruptcy Attorneys Free and Confidential. Licensed bankruptcy attorneys are available. Attorneys will call you to discuss your case for free. Find out if bankruptcy is right for your situation.
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