Millions of Americans are struggling with debt. In fact, one in three people have debt that is so overwhelming, they would qualify for bankruptcy if they decided to file. You are reading because you may be in a position where you are thinking about filing bankruptcy and you want to know, when is bankruptcy the answer to your debt struggles? This is a question that many single moms struggle with if they are newly divorced or single and may have lost the additional income of the other parent, and there is no easy answer. Let us discuss some of the factors you should consider before making the decision to file for bankruptcy.
The type of debt you have:
Bankruptcy can help you discharge certain types of debt, such as credit card debt, personal loans, utility bills, medical bills, and some others. However, if you have a lot of debt that is not dischargeable, such as student loans or child support payments, bankruptcy may not be the best solution for you. There are two different personal bankruptcies you can file which I will discuss later that will briefly explain the difference and which debts each one of them covers.
If your income is low and you are struggling to make ends meet, bankruptcy can help you get a fresh start. During this time with little to know income your stress levels may be high and may be negatively affecting your health and relationships. Look at how your debt if affecting your well-being and if that fresh start is essential to you living the life you desire.
On the other hand, if you have a high income and can afford to pay your debts, bankruptcy may not be the best option for you. I will provide you with a few other options that you can consider to better protect your credit score and maintain somewhat of a positive relationship with your creditors.
Depending on the type of bankruptcy you file, it can help you protect your assets, such as your home and car. If you want a clean slate and do not mind giving your valuable assets back, apart from some debt, then do it. Thinking about someone coming to take all your possession may seem harsh and the thought of going through that process may bring shame and embarrassment but think about how you got in the situation if it were something avoidable and how you could be it better the next time.
The amount of debt you owe:
If you are struggling to keep up with your monthly payments, then maybe you need to consider bankruptcy. Meaning you have tried with make additional income, you stopped overpaying taxes in your paycheck at your job, you have looked at unnecessary expenses and removed them to bring in more cashflow but still cannot see a way to keep up with your monthly payments.
The length of time you have been in debt:
If you have been struggling with debt for a long time, bankruptcy can help you get rid of your debts quickly. Although this is a quick fix think about the behaviors that may have been the reason for debt you have. Also, remember it can take less than an hour to get into thousands of dollars of debt, but can take years to get out of it so be realistic about the length of time you like to be out of debt.
Your credit score:
If your credit score has taken a hit because of your debts because you have been late on your payments and missed several of them, bankruptcy may be able to help. With a low credit score you are paying high interest rates which means it is costing you thousands of dollars on top of your original balance of your debt.
Filing for bankruptcy will not make it much worst if your score is already low, but the bankruptcy can stay on your credit report up to 10 years and affect you credit score for 7 years.
The cost of filing for bankruptcy:
There are certain costs associated with filing for bankruptcy. These costs can vary depending on your state and the type of bankruptcy you file. Those fees can range from $310 up to $5000 depending on if you file on your own, hire an attorney, request a waiver, etc.
Types of bankruptcy for Filing
There are four types of bankruptcies, and each one is designed to help those who are struggling with debt. I am only going to discuss filings for personal bankruptcy, not business. The most common type of personal bankruptcy is Chapter 13, which allows you to reorganize your debts and plan to pay them back over time. This type of bankruptcy is ideal for people who have a steady income but still cannot afford to make all their debt payments.
Debt that is typically covered in chapter 13 includes credit card debts, medical bills, and certain types of taxes. In most cases, you have repayment plan of three to five years setup for you to pay back your debt.
The second personal bankruptcy is Chapter 7. This type of bankruptcy is designed for people who do not have the means to pay back their debts. It allows you to liquidate your assets and terminate your debts. This type of bankruptcy is typically used by people who are struggling with a lot of debt and do not see any other way out.
Types of debt covered in Chapter 7
-Credit card debt
-Certain types of student loan debt
If you are struggling to keep up with your monthly payments, Chapter 7 bankruptcy may be a viable option for you. In chapter seven bankruptcy, all your eligible debts will be discharged. You may also be able to discharge back taxes and certain types of student loan debt. However, there are some debts that are not covered in chapter seven bankruptcy. These include alimony payments, child support payments, most mortgages, and car loans.
Alternatives To Filing for Bankruptcy
There are several alternatives to filing bankruptcy. Which one is right for you? Obviously we're beyond the “just budget for it” stage, so let's talk about some options.
This option can help you simplify your debt payments and potentially reduce your interest rates. However, it does not erase your debt altogether. With debt consolidation you can take out a personal loan to pay off all your debt or a high balance credit card with a low interest rate and transfer your balances on to that card, so you only have one pay to worry about.
Credit counseling or Financial Coach
A credit counselor can collaborate with you to create a plan to pay off your debts over time. This is often a less drastic option than bankruptcy but may still have a negative impact on your credit score. A Financial Coach can also provide you with the mindset support to work through those money behaviors that may have gotten you in a lot of debt and provide accountability and support to help you stick to your debt payoff plan.
The cost for a credit counselor could be $0-$79 depending on your location and services available in your community. For a Financial Coach it could range from $150 per session to $10,500 for the year. It may seem silly to hire a financial coach if you are at the point of considering bankruptcy so do what makes the most sense for you.
This option involves working with a debt settlement company to negotiate lower payments on your outstanding debts. However, this can also be damaging to your credit score, and they charge a fee for their services.
If you are considering filing for bankruptcy, it is important to consult with an attorney who can help you weigh the pros and cons of filing. Bankruptcy is not the answer for everyone, but it can be a powerful tool to help you get rid of your debt and start fresh.
If you’re considering bankruptcy, I encourage you to book a call with me so we can discuss your specific situation and see if this is the best option for you. Together, we can create a plan that will help you overcome your debt struggles and get back on track financially.