That’s the number of bankruptcy filings in the United States (according to US Courts) for the 12 month period that ended March 31, 2012 – the most recent 12 month period for which statistics are available.
Obviously, if you are filing for bankruptcy you have plenty of company.
But when is bankruptcy a good option?
Bankruptcy has become so common, that is no longer carries the stigma it once did. In there are folks out there that think ‘YOLO, I’ll just declare bankruptcy if it gets bad.’ That doesn’t mean you should file for bankruptcy or that it doesn’t come with risks.
The Cost of Bankruptcy
When I talk about the cost of bankruptcy, I’m not talking about attorney fees or court filing fees – what I’m referring to is the effect it will have upon your life.
That will be much more expensive than a couple thousand dollars you will pay for the bankruptcy procedure itself.
Before filing for bankruptcy, consider the impact it will have on your life…
Your credit standing.
If you’ve traditionally valued your credit, it will go right down the drain when you file for bankruptcy.
The ease and convenience of using credit to make purchases will be gone for several years. The credit score you cherished will plummet. When you file for bankruptcy, it will stay on your credit report for seven years in the case of a Chapter 13 filing, or 10 years for Chapter 7. And under current law, should you need to file for bankruptcy in the future, you’ll be unable to do so for at least eight years.
That could become a serious problem if you are hit with a blizzard of medical bills that you cannot hope to pay.
Your ability to get a job – or just about anything else.
Your credit standing doesn’t just affect your ability to borrow money. It can also affect your ability to get a job, to rent an apartment, the costs you incur to set up utilities in a new residence, or the price you’ll pay for an insurance policy.
A bankruptcy can haunt you for several years after the fact.
It’s almost impossible to keep a bankruptcy quiet.
This is because something as important as a bankruptcy usually brings about significant changes in your life. It could result in a change in employment, a move to a different city or state, or the loss of a home.
If it does, that can also mean the loss of friends – some of whom may not view you in quite the same way post-bankruptcy.
Your sense of self-worth.
It’s hard to get past the fact that you didn’t have at least some of the blame for the causes that led up to your bankruptcy filing. That being the case, you may not view yourself in quite the same way going forward.
The bankruptcy represents a financial failure in many ways, and that can be a real blow to your self-esteem.
Before you File for Bankruptcy, Try a Few Other Things First
Okay, hopefully I’ve given you some food for thought as to why filing for bankruptcy is not a step to be taken lightly. The after effects will be with you for several years and that is something you should want to avoid if you possibly can.
Before filing try your best to do a few other things first.
Get real about your financial situation.
One of the reasons why people get into positions where bankruptcy enters the equation is because they don’t have an entirely realistic picture of their financial situation.
A good exercise is to crunch numbers.
Total up your income, assets, and all debts – then match your income and assets against your debts. If you are looking at these numbers and advising someone else, what would you tell them? Would that person be doing well? Or would they be heading for trouble?
In either case, that person is you, so look at your situation for what it truly is, and prepare yourself to do what is necessary to improve your situation.
Cut your expenses – radically.
Unless there is a medical disaster or a loss of income, bankruptcy is usually the result of many years of living above your means. That situation has to be corrected even if you plan to file for bankruptcy. You must get yourself in a situation where you are living beneath your means, and do it as quickly as possible.
If that means selling a car that has a monthly payment, to buy an older car that doesn’t, then so be it.
You have to do what you have to do.
Look, if you don’t start getting your head around your finances then a bankruptcy will only do so much to help you. How long will it take before you get into financial trouble again? And the next time you may not have the option of filing for bankruptcy to bail you out.
If you don’t absolutely need it, sell it.
Most of us have too many possessions and while that is something we may be able to tolerate during prosperous times, if bankruptcy is a real threat it’s time to get rid of a few things.
Sell off any possessions you have that are not completely necessary, particularly those that have loans. Take any money that you get from the sales and either put it in savings, for use it to reduce your debts.
Most people don’t get help until bankruptcy is the only option.
Don’t wait that long!
Hook up with a credit counseling service, get help from family, and if necessary, sell your home. The earlier in the process you do, the more success you should have in avoiding bankruptcy.
It’s a tough pill to swallow, but you need to own up to your weaknesses. You aren’t the only one that’s had trouble handling their finances. If you need help get it.
So When is Bankruptcy a Good Option? When You Have Exhausted All Other Options!
All that being said, there are times when bankruptcy is the only option, and that’s precisely why it exists.
If you have made a real attempt to work out other options as alternatives to bankruptcy, but weren’t successful, then file for bankruptcy without delay. The worst thing you can do is to drag the process on relying purely on hope as a way to get out.
Since bankruptcy is a process that often takes years to play out, the sooner you start, the sooner you’ll see daylight. That should be the goal, to use bankruptcy to deal with your debt problems so that you can put them behind you can get on with your life.
Large uncovered medical costs, prolonged unemployment, or the loss of a business are all perfectly legitimate reasons to file for bankruptcy protection. If any of these situations hit, and you’re unable to overcome them in spite of your best efforts, then go for legal protection.
That’s what bankruptcy was established to do.
When did bankruptcy become acceptable? I can remember when it was almost a scarlet letter. I know it can be blamed on the economy, but it is rather routine now. Don’t misunderstand, I think there are times that it is very appropriate such as unforeseen medical expenses or some other catastrophe. The effects of bankruptcy are are not obvious. I have heard of people doing multiple bankruptcies to avoid bigger issues like overspending.
Glen Craig says
And that’s a big shame. Bankruptcies don’t just cost the person they cost businesses too. A person shouldn’t use a bankruptcy as a way to escape responsibility for debt. It should be a last resort.
Some bankruptcies occur because someone’s business fails and they put too much of their personal equity into the business to try to save it. Then they are not only out a job but penniless, too. Keeping a division between personal wealth and your business is a smart idea.
Glen Craig says
Agreed, but sometimes you have to put your equity into a business to get it started. Still, you need to try and minimize your exposure if the business fails.
Great considerations of the repercussions. The psychological aspects definitely should be considered, in addition to pragmatic concerns such as credit score.
Glen Craig says
It’s definitely not something that should be taken lightly.
The problem with bankruptcy is that it doesn’t teach people any lessons about changing their ways. Once they file the process could start right over again. When people file, it is usually after a long time of collecting debt. I understand it will make it harder for them to be able to obtain loans, but credit card companies know that the government will bail them out even if they make a lot of bad choices like give people who declared bankruptcy credit. The tips you listed above are good, but if my debt situation ever got so bad the one thing I would do immediately would be to get a second job to earn more money. But even with a second job, they would need to follow the second steps you listed to make sure they are not just prolonging the inevitable and are working on getting out of the debt trap.
Dustin Nieder says
For me personally, it seems that Ch. 7 isn’t my only option, but is by far my best. Please explain to me how you could disagree.
1-1-2015 I had climbed out of about 12K worth of debt from grad. school and was completely debt free besides about $40,000 in student loans. Single, in a rental that was underpriced and subletting 3 rooms, driving an ’05 truck I had purchased new and paid off, and was making $78,000. I actually started depositing into a savings account.
Feces meet fan. A fairly new relationship suddenly cost me about 8K, a dog fight for 2K led to another 4K when the surgery didn’t go well, 2K accident in my new car with $350 monthly payment, 7K gone when my tenants left in succession and were not immediately replaced, 3K due to disability following the death of a relative. I am now completely supporting a dependant adult as well, and will soon change employers where my income is expected to drop during adjustment to commission.
My credit dropped from 750 to 580 over the last two months as I started having to pick and choose which creditors got paid. In this situation, why would I not utilize a tool designed to give Americans a clean slate? While some of my decisions were not the best, they were mine to make, and I didn’t have the future disclosed to me when I had to make them. Even if I could decide again, I would make no changes. The boyfriend and the dog stay, and I choose the faceless creditor to suffer.
This amount of debt, even if I could potentially manage it with debt management or Ch. 13, would take years for me to pay off, and anything extra earned at my new sales job would go right to the creditors. Sounds motivating. I currently qualify for Ch.7 according to a means test I took. I currently have 3 adults with zero income in my residence and the 3 months of disability from May – July was not taxable.
Wouldn’t I be crazy not to take advantage of this and start with a clean slate? Why would I concern myself with being at zero debt and no credit when my alternative is terrible credit starting thousands behind? I think I just talked myself into calling a BK attorney, can somebody stop me?
I had a mid 700 credit score, always paid things on time, bought my first home at 19, joined the military, you name it. I was going places! Then we got pregnant and unbeknownst to us, our child would be born with a lifelong disability. The medical bills were extreme. Our child was so sick that my spouse had to quit their job to care for them 24/7 instead of day care. We lost everything, including our home (which at that point was my 3rd), and were forced into bankruptcy.
It was all a blessing I disguise. We were able to simplify, I became more frugal, and vowed to not carry balances on cards. I learned how to coupon. I started to prefer cash over credit, and paid attention to long-term interest rates and not just monthly payments.
Fast forward 2 years later… We were able to get a car loan at 0%, a home at 3.325% fixed, credit cards, you name it, it was ours again.
Fast forward to now, a total of 7 years later… We are back in the mid 700’s, and about to buy another home, purchased cars at great rates, credit limits for us keep increasing, etc.
It just goes to show you that bankruptcy doesn’t always have a bad ending. Sometimes it’s just what people need to start again fresh and come out better than before.
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