Bankruptcy is a business decision… and not just for businesses.
It should be taken as a last resort, because it does wreak tremendous personal havoc and makes rebuilding that much more difficult. However, it is still possible and sometimes easier to rebuild after a bankruptcy.
More importantly, bankruptcy is sometimes not just the best option. It’s the only option.
Can You Realistically Repay Your Debts?
That is the main question behind any consideration of bankruptcy.
If you were to look at what you have left after paying your necessary expenses for food, shelter and healthcare, can you pay off enough of your debts within the next five to seven years to get back on your feet?
Too many well-meaning consumers end up in bankruptcy after exhausting all their savings and worse, their retirement nest eggs. That’s the worst thing you can do, especially if you’re older than 45. It makes picking up the pieces and rebuilding your financial lives for the future.
If a logical examination of your liabilities clearly indicates that bankruptcy is your best or only option, then the smart move would be to save as much of your resources as possible — for the rebuilding stage.
Get Honest Guidance
If bankruptcy is your best or only option, you may have a difficult time getting truly unbiased answers or reliable guidance.
Many of the commercials you see touting bankruptcies are from “bankruptcy mills”: attorneys and law firms who make their money off of helping people file for bankruptcy. Most don’t make their money by giving you unbiased answers about your finances. Rather, they charge fees to prepare and file your bankruptcy papers.
On the other hand, many consumer credit counseling services (even non-profit ones) receive a substantial portion of their funding from the banking and credit industry. These organizations are focused on helping consumers create payment plans for their debts. That creates a potential, if not actual, conflict of interest.
So who can give you honest answers?
Your best bet is to speak with an accountant or CPA, preferably someone who has helped businesses reorganize and even consider bankruptcies. A certified public accountant can take an objective look at your finances and give you an impartial analysis of how long it will take you to pay off your bills — and if bankruptcy is your best option.
Not an Easy Decision
Filing for bankruptcy is not easy. Even if it’s the only option, it will still take a toll on your emotions and cost some money.
It’s also not a slam dunk. Bankruptcy laws today have made it harder for consumers to wipe out their debts. Depending on your situation you may be forced into one of two types of bankruptcy programs.
- Chapter 13. A chapter 13 bankruptcy will set up a payment plan that will last as long as five years. At the end of the payment period whatever is still due may be erased or restructured. This is often used for individuals with decent income and some assets.
- Chapter 7. If you truly have no ability to repay a debt, a chapter 7 bankruptcy will seize applicable assets and use it to satisfy as much of your debt as possible. The rest is then erased.
Getting Ready for Bankruptcy
If you do determine that bankruptcy is your only option, there are several steps you can take to prepare for it.
First of all save your money and pay only necessary bills, such as rent, mortgage and utilities. Avoid putting any money toward unsecured debts, regardless of how much their debt collectors harass you.
Second, see if you can place more of your assets and income toward bankruptcy-protected retirement accounts. Do NOT try to hide assets and income from the bankruptcy administrator! But you should understand that the law does help you protect some of your assets.
Third, you need to start preparing for your rebuilding — even before you file. Try to save practical installment loans from your bankruptcy, such as car loans and mortgage loans. These will help you rebuild your credit faster. You should also make sure to set up bankruptcy-proof accounts, such as checking accounts that you can then use to establish credit.
Finally, before diving into bankruptcy, make a final attempt to renegotiate your debts. Armed with a bankruptcy filing, your creditors may be willing to negotiate for a debt balance reduction and lower monthly payment program.