There have been a number of posters on this board and others over the last few weeks that seem to be seriously contemplating filing for bankruptcy. Being in financial straits is not easy for anyone, and for those who are completely overwhelmed by their situation, the prospect of actively managing themselves out of debt seems daunting and near impossible. When the light at the end of the tunnel is too far away, it looks like there is no light at all, and when faced with seemingly insurmountable debt obligations, it may be only natural that one would consider trying to wipe the slate clean by filing for protection under the U.S. Bankruptcy Court.
For some, bankruptcy is really the only option. Their financial situation has deteriorated so much that there is no plausible way to amend it. It is for these individuals that our bankruptcy laws exist, and for those in that position, it can offer that fresh start.
But for most, the situation is not as grim as it seems. Bankruptcy courts are reasonable liberal in granting a bankruptcy petition and many of those who file didn't really need to. They just couldn't see the alternatives.
Even if there really is no hope, bankruptcy is a last choice -- always. In an effort to demonstrate to those of you who may be considering a bankruptcy filing, I've compiled a list of reasons why you don't want to. Yes, the list is meant to scare you a little, but worry not – once you understand why, unless absolutely necessary, you shouldn't file for bankruptcy, I'll then offer a number of ways you might be able to improve your situation without the aid of the courts. Whether you can see it or not, there IS a light at the end of the tunnel – and yes, you can get there!
8 reasons why you should NOT file for bankruptcy
1. Bankruptcy will ruin your credit for a minimum of 10 years. Filing for bankruptcy will release you from many of your debt obligations such as credit cards. Your inability to pay is reflected on your credit report and will remain there for a minimum of seven years. A bankruptcy filing is also one of the most damaging elements to your FICO score (the numerical assessment of your creditworthiness). With such a mark on your report, you will have extreme difficulty securing credit of any kind (including credit cards, automobile loans, and mortgages), and, even if you do, the interest rates will be exorbitant (think 24%). Even once the bankruptcy has cleared from your credit report, it may take much longer to repair your FICO score. Further, many credit applications ask whether you have filed for bankruptcy – not just in the last seven to ten years, but EVER.
2. You will lose some of your possessions. Although bankruptcy will often protect such necessary assets as a house or car, you may be forced to sell some of the things you own, especially luxury items, to help settle your debts prior to the bankruptcy's discharge. Part of filing for bankruptcy involves listing all of your assets, and it is a criminal offense to purposefully omit any of them. Cash, bank accounts, stocks, bonds and other investments, a second car or truck, your primary car or truck if over a certain value, second or vacation homes, stamp, coin, and other collections, and family heirlooms are all types of property.
3. You will lose your credit cards. It's highly likely that if you are considering filing for bankruptcy, it's credit cards that got you there, so the loss of your ability to “charge it” might not be a bad thing. But, as I said in point 1, you're not going to find it easy to get new ones for a long time and thus filing for bankruptcy will all but force you to be on a strictly cash basis. If your car breaks down, or some other unforeseen event occurs, you might find it difficult – or impossible – to be able to produce the cash necessary to deal with it. Although all Fools recommend having an emergency fund for such situations, it is likely that if you are at the point of bankruptcy that you do not. Regardless, the bankruptcy court will require you to use any money in your emergency fund to help settle your obligations. As such, spare cash will be sparse.
4. You cannot file for bankruptcy again for 6 years. But, hey, why would you need to right? Imagine this scenario. You file for bankruptcy to help ease the your financial burdens. Three months later you are involved in a traffic accident that is deemed to be your fault. The driver of the other vehicle is seriously injured. He sues you for millions of dollars and a judgment is entered against you. You have given up your only method of protection. As an additional note, certain types of judgments are not eligible to be discharged in bankruptcy. See point 5 for more information.
5. Not all obligations are discharged in bankruptcy. Student loans, income taxes less than three years due, and back alimony or child support are the most significant items that are non-dischargeable. In addition court judgments for injuries or death arising from your driving under the influence, debts incurred on the basis of fraud (such as lying on a credit card application), debts arising from a martial separation or divorce are other types of obligations that might be upheld in a bankruptcy proceeding.
6. You will become part of the public record. Bankruptcy proceedings are public record, and your name and certain details about you will be recorded in the court documents. Your filing will also likely be reported in the “Legal Notices” section of your local newspaper. Anyone who wants to find out information on you and your bankruptcy can – and this includes potential future creditors. There is also a stigma attached with the public notice of your financial situation. Most people tend to keep their financial lives very private – if you file for bankruptcy that will not be possible.
7. Bankruptcy is the admission of defeat. Although there are some situations that could happen TO you that could drive you into bankruptcy, the overwhelming majority of personal bankruptcies are caused by the individual's own actions. You agreed to the debts that you are now buried behind, and filing bankruptcy is saying you can't manage your own life – that your promise (in this case a promise to pay) is no good. It's a personal defeat.
8. Bankruptcy affects more than just you. When your debts are discharged in bankruptcy, the people and companies you owe are forced to write off the debt as uncollectible. Rather than you paying what you owe, they end up eating the loss. And, even if they are a large public corporation, a loss is a loss. Your debt doesn't magically disappear; it is absorbed by your creditors, who may, in turn, be
forced to raise prices, reduce services, or even file for bankruptcy themselves. A single bankrupt individual might not have a big impact on the general economy, but a large group of individuals filing for bankruptcy could. Why contribute to the disintegration of the nation's financial state unless absolutely necessary?
8 ways you can avoid bankruptcy
1. Change your attitude. Step one in the path to avoiding bankruptcy is to start believing that it's possible. A positive attitude is paramount for affecting change. But a positive attitude alone will not get you to your goal. You can't simply wish away your debts. Other points will address how to ease the burden, but in addition, you need to change your approach to finances. If you're in this situation because you've simply spent to much and overextended yourself, what's to prevent you from doing the same thing again, even if you are bailed out by the bankruptcy court. Almost 10% of people who file for bankruptcy will file again in their lifetime. That is not success. Develop a plan, modify your behavior, and the path to financial freedom will unveil itself. And remember, you CAN do it!
2. Contact your creditors. Those that you owe money to would certainly rather you pay them something than nothing at all. Many will lose all rights to collect anything from you if you file bankruptcy. Given that, many creditors will work with you to develop terms that will allow you gain some financial breathing room while still satisfying your obligation to them. You may be able to negotiate a lower interest rate and/or longer payback periods. You may even be able to get a creditor to accept a partial payment as settlement. Rather than run to the courts, start with the people you owe. It's amazing what a few phone calls or letters can accomplish.
3. Consider debt counseling. There are a number of companies and non-profits out there that can help you in managing your debt. Many can negotiate with your creditors for you. What you really want to look for, however, is a service that will provide counseling on how YOU can manage your situation and on what to do to ensure that you don't end up in this situation again. Be wary, however, of the companies that make “too-good-to-be-true” claims such as those who offer to get bad credit information removed from your credit report. If you can, stick with the non-profit counseling agencies, and do plenty of research before you sign-on with any of them.
4. Consolidate your debts. One way in which to unload yourself from the month-to-month burden of your debt is to leverage your assets against your debts, such as taking out a home equity loan to pay off your credit cards. This is not a decision to be taken lightly, however, as shifting your burden can make you more susceptible to financial trouble by risking your property. If you pay off your credit card debt with a HELOC, for example, you must ensure that you don't begin to charge more on those now paid off cards.
5. Consider selling some of your stuff. As I mentioned above, the bankruptcy court may force you to part with some of your possessions should you file. Why let someone else dictate what you can and cannot keep? Do it yourself. Are there things that you own or subscribe to that you don't really need right now, especially when you consider the financial shape your in? Maybe it's time to give up that subscription to NetFlix, cable TV, or Broadband internet. Perhaps you should consider selling some of the things you've collected over the years. With internet auction sites, it's not so hard to do. Can you live with a less expensive car? Trade in or sell yours and buy a cheaper one. If you look around hard enough, I'm certain you'll find some things you can turn into cash, or at least stop outlaying cash for. Each may only bring a few dollars in extra cash or savings, but collectively they could add up to more than you expected.
6. Live below your means. Living below your means doesn't necessarily mean washing and reusing freezer bags, buying the absolute cheapest toilet paper you can find, or stopping to pick up every stray penny you find on the sidewalk. Sure, each of these tactics can help you save a nickel here-and-there (and many self-made millionaires are the most frugal people out there), but the concept is really much more simple. If you make X dollars each week or month, then X dollars is all you have to spend in that week or month. If you spend X+ dollars, then guess what? You're going to go into debt as a result. But, when you live below your means (spending less than X dollars each week or month) then you have cash left over – cash that can go towards eliminating your debt faster, building an emergency fund, or investment. Most important, having extra cash at the end of the day means you didn't incur any more debt.
7. Establish a budget. Budgeting is a integral part of financial responsibility and an absolute necessity for someone recovering from financial troubles. In order to live below your means, you first need to know what your means are. Budgets do not have to be large, cumbersome, Excel-based spreadsheets. They can be as simple as listing your income and subtracting your known expenses. The remainder is what you have available for discretionary spending. Don't exceed it. Budgets also help you to track what you're spending your money on. You might not realize that you spend 10% of your income on dining out until you've tracked your spending for 3 months or so. Often simple awareness is the catalyst to behavior modification. Plan your financial future and you'll have a nice road map to follow as you move toward your goal.
8. Ask for help. No one person can move a mountain, and here you are sitting with a mountain of debt. Yes, you need to bear the brunt of the work in clearing it up, but when you get frustrated or depressed, are unsure about how to proceed, or need an extra push along the way, reach out to the people closest to you. That could include family members, friends, or even the faceless and sometimes anonymous people here on these message boards. A fellow Fool might help you to get that budget started, your sibling might loan you than extra $50 you need to get by next month, and your best friend might be there just to listen to you when you get depressed and help encourage you to keep trying. Those that are close to you do not want to see you struggle; they want to see you succeed.
There are a plethora of resources available both here on TMF as well as in cyberspace. Here are a few that may help you most:
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