Q: If you do not have the money to pay off debts, is it better just to file bankruptcy?
A: You wouldn’t be alone in seeking refuge in the bankruptcy court.
The total number of U.S. bankruptcies filed during the first three months of 2009 increased 34.5% over the same period in 2008 nationwide, according to data released by the Administrative Office of the U.S. Courts.
“Consumers and businesses are increasingly seeking bankruptcy protection in order to shelter themselves from the financial storms brought on by the current economic climate,” said Samuel J. Gerdano, executive director for the American Bankruptcy Institute. “As unemployment figures continue to rise and financing remains elusive, we expect filings to surge past 1.4 million cases by year-end.”
In some of these cases people could have avoided filing for bankruptcy. Often, with an overwhelming amount of debt, people just give in and file for bankruptcy. But in my book, you have to work your butt off before you get the right to file for bankruptcy. Filing for bankruptcy ruins your credit for 10 years. But just as importantly, there are moral implications. You are saying you are not a person of your word.
You need to do everything in your power to honor your debt obligations. Think about it. Behind those debts are companies with employees who provided you with goods or services for which they expected to be paid.
I’m not saying bankruptcy is a sin. The process is there and should be used by people with no other avenue. Crippling medical debt, for example, can torpedo a family. If you’ve lost your job by no fault of your own and just can’t make it, bankruptcy may be an option.
But I keep saying bankruptcy “may” be an option because you need to take some steps first. Here’s what I recommend before you file for bankruptcy:
- Develop a budget to make sure you have cut everything possible to try and pay off your debts. If you have a $100 plus cable bill, you can cut that down; if not, cancel it. If you are spending $100 or more to keep your cell phone service, you need to cut that back.
- Exhaust all avenues for income. If you have one job, can you get a second one? Can you get a part-time job and devote that income to paying down your debts?
- Is there anything you can sell? Have a garage sale or put things on eBay or Craigslist. Could you downsize your car (if you aren’t upside down) and get a cheaper car, taking the extra funds and using it for your debts?
If you are still at a loss, go to the National Foundation for Credit Counseling Web site. From the home page, click on the link for “Find a Counselor.” You can contact a counselor either via the Internet on in person. Call the agency, and see if a counselor can help you set up a debt repayment plan. In fact, recently, the National Foundation for Credit Counseling negotiated with the nation’s top 10 credit card issuers to develop two special debt repayment plans. Under this new repayment program, debt-ridden consumers can qualify for a “standard” or “hardship” plan, with fixed monthly payments and a goal to be out of debt within 60 months. Those who qualify for the standard debt repayment plan would pay 2% of their outstanding debt each month. If the hardship plan applies, their payments would drop to 1.75%. To make the plans work over the five-year repayment period, creditors have agreed to immediately stop or lower fees and interest. However, principal balances are not reduced.
What I’ve laid out for you is the course of action to take before even considering bankruptcy. Go through these actions first, before you consider whether this is your best option for debt relief.