Whether bankruptcy is right for you depends on your own individual circumstances. Bankruptcy is designed to give a fresh start to individuals and families with overwhelming debts. It is a last resort. Before you file for bankruptcy, you should weigh all your options carefully.
You may be able to reduce your debts by negotiating with your creditors first. Creditors are the people to whom you owe money. They might be able to reduce your interest rates or lower your payments; it may be in your best interest to try to work the problem out before it gets to Bankruptcy Court.
In some situations, however, bankruptcy is the best option. When making the decision to file for bankruptcy, factors to consider include:
•your total debt;
•the kinds of debt you have, and what your rights are regarding that debt;
•your overall financial condition;
•which of your assets are protected from creditors;
•your income and whether any of your income sources are protected from creditors;
•your ability to pay your monthly expenses excluding your debt;
•the potential effect of bankruptcy on your credit rating; and
•how much you are being harassed by creditors.
You may also want to consider whether your situation is as bad as it is going to get. If you file for bankruptcy now, and then find yourself still unable to make ends meet, things could just get worse. If you file for bankruptcy under Chapter 7, you are barred from doing it again for the next eight years. In such circumstances, you may be better off waiting it out until you can make lifestyle changes that will better enable you to pay your bills. Each person has a different situation, and bankruptcy proceedings involve complicated rules and paperwork. Therefore, if you are considering filing for bankruptcy a consultation with a bankruptcy attorney can help you learn about how bankruptcy could apply in your particular circumstances.
There are some general considerations to review as a preliminary step. First, bankruptcy may be damaging to your credit rating, and bankruptcy may appear on your credit report for up to ten years. If you later decide to apply for a bank loan, for example, you may have a difficult time getting approval. Some banks will not loan money to people who have ever filed for bankruptcy. However, other banks may look at your filing as a positive step toward reestablishing a solid credit history. Overall, if you are eligible for bankruptcy, filing will not usually make your credit rating worse. Most people filing for bankruptcy are already behind on their payments and often already have a bad credit rating. In addition, your credit rating may not be important to you for a special reason, for example, if you own your home mortgage-free. (See also the question on Credit Reports, p.132)
Second, you may be in a situation where you have very little cash, yet many substantial assets. If so, you will want to be very careful. Although most of your property will probably be protected from sale, if you have certain types of very valuable property, you may not be able to keep it. If you file for Chapter 7 bankruptcy, many of your assets could be liquidated. When assets are liquidated, they are often sold for much less than they are worth. It is important that you explore all your options and consider all the consequences of bankruptcy before making a final decision.
If you decide that filing bankruptcy would not be the best thing to do at this particular time, you may benefit from consumer credit counseling services. Consumer credit counselors generally help assess your financial situation, including your expenses, assets, income, and debt. They may call your creditors for you in order to arrange a payment schedule and help you set up a budget you can live with. These programs are generally inexpensive and can be very helpful. In fact, credit counseling is now a prerequisite to filing for bankruptcy. An individual must meet with a credit counselor in the six months prior to applying for bankruptcy. Beware, however, of debt management plans that only offer management of credit card debt. Many such plans may be advertised on TV. Only a plan that includes consideration of all your types of debt, plus your income and expenses, is likely to help you make progress toward getting a handle on your debt.
Another option may be to take out a bill consolidation loan. When you take out a bill consolidation loan, you are only responsible for one large payment. Typically bill consolidation loans must be secured by your home, which may put your most valuable and protected asset in jeopardy, and the best rates and terms for these loans are not always the best option. Generally only seniors who are house-rich but cash-poor are good candidates for consolidation loans. Predatory lenders may offer bill consolidation loans that look attractive, but are actually filled with high or hidden fees and high interest. Converting unsecured debt, like credit card accounts and medical bills to secured debt is often not the best option because you could jeopardize your assets and give away some of your legal rights in the process.
For more information, see: 11 U.S.C. 101-112 (2015); National Consumer Law Center, Surviving Debt: A Guide for Consumers (5th ed. 2005); James W. Martin Jr., Bankruptcy, in The West Virginia Practice Handbook Vol.1 (The West Virginia State Bar, Young Lawyers’ Division, eds., 4th ed. 1996).