In over 19 years of being a bankruptcy lawyer I’ve heard – and been part of – both sides of the discussion about how smart it is to file for bankruptcy. After much consideration, I’ve concluded that it’s a stupid conversation.
There’s a lot of misinformation out there about bankruptcy.
Credit counselors and debt settlement companies will tell you it’s the worst thing for your credit, in spite of the fact that even the Federal Reserve Bank of New York (you know, the folks who run the banking system) says that’s untrue.
On the other side of the discussion comes the bankruptcy lawyers who think that a trip to bankruptcy court is the cure for what ails your financial situation.
And a recent article in Huffington Post includes a story of someone who, upon hearing that a friend was going to file for bankruptcy, responds with, “congratulations.”
If you’re in debt and don’t handle it, you’re putting yourself at risk financially. Retirement, after all, is one day closer every time the sun rises. Illness, job loss, family upheaval and an unexpected household repair can all cause calamities if you’re not on firm financial footing.
But the key isn’t whether bankruptcy is good or bad – it’s one of attending to your financial problems in the best manner possible.
And here’s what you should be doing instead.
Begin with Expenses
Start with looking at your budget and trying to figure out whether your debt problems are the result of a low income, poor budgeting, or both.
Take each expense and ask yourself whether you can live without something, or if there’s a less expensive option. View every dollar under a microscope, then start investigating options.
I’m not necessarily telling you to cut the Starbucks out of your life – that’s been beaten to a pulp by the personal finance pundits. But can you switch your cell phone service to a provider that may be less expensive without a reduction in call quality?
Can you cut out a few pay channels from your cable television service, or block the on-demand movies so the kids don’t rack up hundreds of dollar in extra fees each month?
If you’re paying student loans, have you investigated some of the federal programs that may bring down your monthly payments?
Move to Income
You’ve gone through your budget an slashed expenses – good work!
But the job’s not done. You need to look at your income to see if you’re making enough money at your job.
I’m not going to tell you to start delivering pizza at night to make more money. If you’re working full-time then you do plenty as is. You shouldn’t have to work 20 hour days just to make ends meet.
Look around and see what others are making in comparable positions with similar backgrounds and experience. If they’re making more, it may be time to think about a new employer or asking for a raise from your current boss.
Take a look at your family. Are the kids old enough to get part-time jobs so they can fund their own entertainment and cell phones? Is your spouse able to work outside of the house? If so, time for a family meeting about earning your fair share.
Is There Enough?
You’ve got your expenses down and your income up. Now take out the debts and add them up – all of them, even the ones you’re currently paying.
Is there enough left over at the end of the month to pay off the debts over the next 3-5 years? If so, that’s probably what you should do.
And if not, you’ve got some thinking to do.
If You Can Pay, You Probably Should (But Only If … )
Even if you can pay off all the debts over the next 3-5 years, you need to look at the rest of your world to see if it makes sense to do so.
If you’re expecting a massive change in your lifestyle such as retirement, you’ve got to make sure you’ll have enough money to make that change. If not, can you get there while paying off the debt?
Retirement isn’t the only change you may need to plan for. Kids head towards college, parents get older and need financial support, and more. Plan for those financial hiccups before making the decision to plow all your money into debt repayment – if you don’t, you may end up paying off all your debt only to dig yourself back in the hole later on.
Bankruptcy Is One of Many Options
If you can’t pay the debts then you can look into filing for bankruptcy.
But before you do, investigate all other options for debt relief.
That includes credit counseling and debt settlement.
You need to get the facts about all options so that you can choose the one that’s right for you.
Pick the Smart Option
Bankruptcy is the right choice when the others are wrong.
This isn’t a solution you pick in a moment of despair, and it’s not one that you avoid in the face of logic.
Choose the solution that works for you, and do it only after taking the steps you need to make the right choice.
In the end, that’s the only smart move to make.