Make no mistake about it. Bankruptcy will have a dramatic effect on your life. It will stay in your credit files for 10 years. Many employers now routinely do credit checks of prospective employees and a bankruptcy could dim your chances of getting a good, new job. Your insurance premiums will likely go up after your bankruptcy. And, of course, your credit score will take a very serious hit. How much of a hit it will take will depend on what your credit score was before your bankruptcy. But it could be as many as 200 points. In turn, this could drop you from having “good” credit to “poor” or even “bad” credit.
There are no concrete rules
Unfortunately, there are no concrete rules as to whether you are a good candidate for bankruptcy. Everyone’s different. Whether you decide to file or not will depend partially on facts, somewhat on emotion and to some degree your view of your future. One individual owing $40,000 in debt and can’t sleep at night because of it could see great future opportunities and decide to pay off the debt. But then someone else with the same amount of debt but feels that his or her future looks hopeless could decide to declare bankruptcy.
Understanding the consequences
A bankruptcy is sometimes called the nuclear option because of its consequences. It’s in an area where you should proceed with caution and a complete understanding of what it will mean to your future.
The financial aspects
Of the three elements discussed above – the facts, emotion and your view of the future – the easiest one to quantify is the financial facts. You should sit down, figure out how much you owe, your monthly payments, the percentage of your income that you could devote to your payments and whether you could free up money from your income to make higher payments.
This is much harder to quantify. Could you handle the burden of staying in debt much longer? Are you receiving calls from creditors that are getting to you? Are you having a problem sleeping at night? Are you and your partner or spouse constantly fighting over money? If you file for bankruptcy will you feel like a failure? These are all questions worth answering and if the answer is “yes” to most of them you might be a good candidate for bankruptcy.
Finally, the third element you need to consider before filing is how you see the future. What are your prospects and could you handle the consequences of a bankruptcy? Having a bankruptcy in your credit file can affect you in getting a promotion, a new job, renting an apartment and your ability to make major purchases. You absolutely need to consider your goals for the next 10 years.
Get counseling first
Credit counseling can be a good way to determine whether or not you’re a candidate for bankruptcy. There is probably a good, nonprofit consumer credit counseling agency in your area but if not there is numerous ones available on the Internet. Just make sure you choose one that either charges nothing or very little for its services – which is typically true of nonprofit credit counseling agencies.
Whether you go to a credit-counseling agency in person or via the Internet you’ll have a credit counselor that will thoroughly review your finances and then make recommendations based on your ability to pay and your goals. Following this meeting you should have a very good understanding of what would be your best course of action given your situation. If you are working with a non-profit counseling agency it’s likely that your counselor will ultimately suggest a debt management plan (DMP) as an alternative to bankruptcy. This is where the two of you develop a plan for paying off your creditors with payments you could afford. Following this, the counselor will likely contact your creditors and attempt to negotiate reductions in your interest rates. He or she will then present your DMP to them for their approval. Assuming that all or most all of them except your DMP you won’t have to pay them anymore. Instead, you will send the credit-counseling agency a check each month and it will take responsibility for paying your creditors. The credit-counseling agency will likely require you to give up all of the credit cards in your DMP and strongly advise you to not take on any new debt until you’ve completed your plan – which typically takes about five years.
If this interests you then here, courtesy of National Debt Relief, is a short video with some good tips for choosing a credit-counseling agency.
Explore options such as debt settlement
There are other alternatives to bankruptcy besides consumer credit counseling. One of the most popular of these is to use a debt settlement company. These companies are generally able to settle debts for about 50% of your balances. They do this by offering lump sum payments to settle your debts. This process can take several years during which time you will be paying the settlement company a set amount each month, which will be deposited into your escrow account. As funds accumulate in your account the debt settlement company will use them to pay for the settlements it’s able to negotiate on your behalf. The debt settlement company will assume full responsibility for interfacing with your lenders and any debt collection agencies, which will relieve you of this burden.
Of course, this will cost you something. Reputable debt settlement firms generally charge a flat fee that can be anywhere from 15% to 25% depending on the size of your debt. However, they should save you enough money to more than offset their fees. In addition, your debts will have been consolidated and that you will have just one payment to make a month to the debt settlement company, which should be considerably less than the sum of the payments you’ve been making to your lenders. While debt settlement will adversely affect your credit score it will not damage it as much as a bankruptcy. Plus, future lenders will see that you did what you could to pay off your debts instead of just walking away from them, as is the case in a bankruptcy.
Try debt negotiation
A third alternative to filing for bankruptcy is one that would have little or no effect on your credit score. It’s contacting your lenders and negotiating concessions that would make it easier for you to repay your debts. For example, you could negotiate a reduction in your interest rates or to have your payments waived for several months, which would give you time to get your debts organized and to begin catching up on your payments. Or you might be able to get your payments converted into a payment plan where you would have a fixed payment each month for a fixed period of time.