In today's credit-happy society, it can be deceptively easy to spend beyond the limits of your monthly budget. In other cases, an uninsured medical catastrophe or legal crisis could leave you battling bills that no average family could pay.
Read this blog to learn more about the factors you'll want to consider when deciding whether a Chapter 7 discharge or Chapter 13 repayment plan could be in your best interest, as well as a few specific situations in which bankruptcy may not be the right choice at this time.
Which Factors to Consider.
Before making an appointment with a bankruptcy attorney, you'll want to ask yourself a few questions and gather some of the relevant documents to make your decision both easier and better-informed.
Do I Have the Full Picture?
If you've avoided looking at your credit report or even stopped opening your bills as the debts began to pile up, you simply don't have the information you'll need to decide whether bankruptcy makes sense.
Because both Chapter 7 and Chapter 13 bankruptcy proceedings have limits on the amount and type of debt that can be discharged, knowing exactly who and what you owe is crucial. You may want to schedule at least an evening analyzing your annual credit report and bills. Taking this first step can make your next steps clearer.
Do I Expect Any Windfalls or Salary Increases?
For many, consumer debt that seems unmanageable can be easily repaid after a few promotions or pay raises. If you're expecting an inheritance or raise in the near future, declaring bankruptcy could damage your credit score and leave you unable to qualify for a mortgage or auto loan, despite the extra cash.
On the other hand, if your current or projected future income is obviously insufficient to repay your total debt, or if your interest is accruing more quickly than you can pay it down, bankruptcy can be a viable choice.
Am I Prepared to Live With Bad Credit?
while the impact bankruptcy has on your credit score can depend largely upon the original score itself, lenders generally see bankruptcies as a red flag.
Before pursuing bankruptcy as an option, you'll want to ensure you're adequately prepared to go without new credit lines, like credit cards, auto loans and home equity loans, for the next few years.
When Bankruptcy May Not Be Appropriate.
There are situations in which bankruptcy may not be the best choice. Sometimes bankruptcy either won't discharge or restructure the bulk of your “problem debt,” typically because you have personal or professional circumstances that could make the consequences of a bankruptcy untenable.
Most federal and private student loans aren't dischargeable in bankruptcy. If the majority of your debt is education-related, you'll want to consult your attorney to see whether bankruptcy is a viable option.
Declaring bankruptcy on a relatively small amount of consumer debt while leaving your student loan debt untouched could tank your credit score for years without providing you the benefit of a clean slate, so you'll want to proceed carefully.
Some who work in public service or financially sensitive positions may find that the career consequences of bankruptcy will have more of a lifetime impact than slow repayment of the debt.
If you or your spouse is an elected official or works in an industry that requires regular credit monitoring of all employees or holds another position of public trust, you may want to thoroughly investigate your non-bankruptcy options. A thorough investigation will ensure you don't lock yourself into a decision you may later regret.
Regardless of your decision about declaring bankruptcy, consulting an experienced attorney or law firm can ensure you've evaluated all possible options. Bankruptcy is a serious solution that shouldn't be pursued lightly, but, in many cases, it may operate as a life preserver to someone drowning in debt.