Is Bankruptcy the Right Decision?

02 Jan Is Bankruptcy the Right Decision?

There is no “right” way to determine whether bankruptcy is the right decision. There are as many approaches to making that decision as there are people considering the question. But I have learned through discussions with colleagues, and through this blog (and others of similar ilk) that most of us take a similar approach. And all of us recognize that every case is different, and every client’s situation is unique. Here’s how I start.

The first thing I look at is the amount of overall debt, and how it is structured. I want to get an overview of how much is owed, and to how many creditors. There is no one factor that “qualifies” a client for bankruptcy. For example, a person who owes one $25,000 medical bill may have different options than someone similarly situated who owes 10 credit card companies $2500 each. Similarly, whether there is collateral for the debts, or whether the client owes tax debts or child support obligations may also be factors in making a decision. I recently filed a case where the client only owes about $4,000, but $600 of that was to a title loan lender who was threatening to repossess the car, and the balance was owed to payday advance lenders and finance companies. To me, the interest the debt carries and the repayment terms are just as important as the amount of debt when deciding whether bankruptcy is appropriate.

I also consider income and expenses, and again, every situation is unique. Someone with a modest income who doesn’t have to make a mortgage payment may actually have more disposable income than someone who makes more money, but whose income goes to pay mortgage or car payments. Fluctuation in income should also be considered, because that may make it more difficult to adhere to any sort of payment plan.

Taking those things into account–the amount of debt and the way that debt is structured, along with how much income is left over after paying living expenses–the key question is then whether the current debt can be amortized–paid off–over a reasonable period of time. To me, a reasonable time is five to seven years, though opinions could differ on that point. I think ten years is the outer limit, because that is the length of time that a bankruptcy stays on your credit record. If you can’t pay the debt off in that time, even if you can keep up with minimum payments, I think bankruptcy should be a serious consideration.  Here’s why:

A bankruptcy, whether a Chapter 7 liquidation or a Chapter 13 restructuring, offers a fresh start, with a way to reduce or eliminate the debt you are servicing. If you can’t pay your debt off in a short period of time, you’re just churning interest, and that prevents you from saving. So, instead of investing your disposable income in retirement or other savings that will grow and protect you and your family, you are perpetuating a situation that prevents saving, and inevitably leads to more borrowing. After a point, you have so much of your disposable income going toward debt service that any time an emergency arises you are forced to borrow more. It’s a downward spiral, and absent a windfall like winning the lottery or inheriting a fortune, bankruptcy may be your best way out.

An experienced bankruptcy attorney can help you figure out whether bankruptcy is right for you, and if so, what kind of bankruptcy best meets your needs. Then, think about where you want to be in five to ten years. Hopefully you won’t be paying the same old interest on the same old debts, when the first of 2013 rolls around.

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