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Declaring Bankruptcy

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Declaring Bankruptcy

I've been paying close attention to your articles on debt, and have a question for your readers. We have racked up a lot of debt for our age ($20,000) mostly in credit cards and doctor bills. Family has told us that our easiest way out of this is to file bankruptcy. I know people that have had a lot more debt and filed for it and they seem okay now financially. Is this the right way to go?

Also, if I file bankruptcy what should I do about the doctors? The only one I really am worried about is the kids' doctors. I don't want to have to change doctors for them. Will I have to? My mother-in-law tells me that the doctor will write it off. I hate to have to do this but I feel like we are out of options.
Thanks in advance for any advice!

Consider the Options

Before you file for bankruptcy there are a couple of things that you should do.

Option 1. First, you need to cut up or hide all your cards. Don't touch them! Systematically start paying just the minimums on all by the highest interest card. On that card pay as much as you possibly can. "Attack" that card financially till it is paid off then continue to the next one. Until all are paid off. Second, call your doctors. Make arrangements to make monthly payments to everyone. Even if you can only afford $5 a month this is better than nothing, which is what they will get if you file bankruptcy. You will need to be faithful and consistent to show you are trying to pay.

Option 2. Call The Credit Counseling agency in your area. They will evaluate all of your spending habits and take what you make and make arrangements with your creditors to make payments. You will write them a check and they will disperse it. They have a little more pull with credit card companies if you cannot make even the minimum payments at this time.

Check with the Professionals

I was formerly employed by an attorney who was also a Chapter 7 Trustee in Bankruptcy. A person wanting to file for bankruptcy must first acquire the services of debt counseling. After that, if the person(s) are able to file for bankruptcy. Credit card debts are paid back at a percentage of what is owed. As for the doctors, yes, they will probably write the charges off. Personally, I would try any alternative I could before making the final decision to file bankruptcy.

Bankruptcy filing will stay on your credit report for up to 10 years. You will also pay much higher interest rates (as much as 26% on credit cards) when you try to rebuild your credit in the future. Either way you choose to go, please do not take the advice of family and friends. Speak to an attorney so he or she can look over your situation and advise you what would be the best thing for you to do. Call the Bar Association in your state to find out what attorneys are in your area who specialize in bankruptcy and call for a consultation. In some cases you may find an attorney who offers a free consultation.

Make a Plan to Eliminate the Debt

First off, you need to figure out what caused the debt. Was it a one-time medical situation, a job loss, or overall bad spending habits? Those aren't the only options, just the three most likely in my opinion. The next step is to figure out how much you can put toward your debt (realistically) each month. Can you think of additional ways to earn money? Doctors and even credit card companies will work with you if they know your situation and that you are trying to figure out a way to pay them off rather than file bankruptcy. They may lower interest rates or reduce the amount you owe rather than lose it all. When you call them, you need to talk calmly and explain your situation. Ask them if there is a way they can help you avoid having to file bankruptcy. You really do want to avoid bankruptcy if you can.

Also, while $20,000 is a lot of money, it is also a reachable goal. If you own your house, you may be able to refinance (at good rates these days) and get some of the money out of that. Picking up a part-time job is also a big help. But most of all look at your spending habits. Everyone I have ever dealt with spends money they don't need to spend, throws out things they could sell at a garage sale or consignment shop and just wastes money without realizing it. You can get out of this debt without bankruptcy. It won't be easy, but it will be worth it.

Downside of Bankruptcy

I would not file for bankruptcy. My husband had about $22,000 worth of debt before we were married, about half of which was money related to his repossessed motorcycle. He was given bad advice to file and did. Now he cannot get any credit without enormous interest rates 22.9% and 29.9% and he will now have to deal with it for the next 10 years before it will be wiped from his record. Also bad credit will mean that many types of jobs will be unavailable to you because you are deemed a risk.

A financial advisor recently told me that you shouldn't file unless you are in debt 2 or 3 times your annual salary. Unfortunately we didn't know this until after he filed. I would recommend getting some books on debt from the library and I would seek the advice of one of the Consumer Credit Counseling Services. They can help significantly reduce finance charges and can consolidate you bills into one easy payment so that you can get your debt paid off in no time. Paying off debt means reducing expenses (making sacrifices), earning extra income and paying the minimum payments on all your bills on time. Then focus on paying just one off adding as much extra to that one bill, and then move to the next one. I always pick the bill with the smallest balance. That way I see the results of my struggle a little faster, picking the bill with the highest interest rate can mean waiting a long time before that balance really goes down.

Beware the Quick Fix

We filed for bankruptcy about 15 years ago, and we are 'ok' now, but it has been a long, tough time getting over it. Even now, we are in debt again, because we didn't really learn how to properly handle credit, but we are doing everything possible to not file bankruptcy again! My main advice to you is that if you file for bankruptcy, make sure it is your absolute last resort. There are many things you can do to get out of debt, even though it may take a few years. A few years of diligent action is a lot better than 10 years of a really bad mark on your credit report that can keep you from making purchases or doing things you want to do. Aside from not being able to get loans for cars and houses, we actually had our renter's insurance cancelled because of the bankruptcy on our record. We were considered a bad risk!

Here are just a few suggestions of what to do:

  1. Visit your local Consumer Credit Counseling agency. They may be able to work out a payment plan with your creditors, and offer valuable advice on how to stay out of debt.
  2. Cut back on 'luxuries' like cable TV, eating out, etc. Put the extra money towards your debts.
  3. At the end of each day, put your change in a jar. At the end of the month, use that money as an extra payment on your highest rate credit card.
  4. Any time you get a windfall of money (tax return, gifts, bonuses) resist the urge to spend it on fun things. Instead pay down your highest rate credit card. You will be better off in the end.
  5. For your medical expenses, simply work out a payment plan with your doctor. I don't know what they would do if you filed bankruptcy, but I do know they are willing to take small payments each month rather than write off your entire bill.
  6. I highly recommend you read some books by Ric Edelman. The best one so far, in my opinion, is The Truth About Money. It may be available at the library by now or you might find it in a used bookstore. He has really good advice on how to get out of debt and stay out!

The thing I regret the most about filing for bankruptcy is that I never really learned the value of delayed gratification. I always got what I wanted, when I wanted it with credit, and when the debts became too much, I just jumped right into bankruptcy for 'quick relief'. That may not be your attitude at all, but I just know that I would be a better person today if I had toughed it out a little longer and taken better responsibility for my actions. One last thing, if you do decide to go with bankruptcy, you don't have to claim all of your debts. You can decide to pay off the doctor bills and avoid any trouble with having to switch doctors. Just think real hard before taking action!

Resources to Consider Before Declaring Bankruptcy

Although many people consider bankruptcy an easy way out, it should be a last resort. It can stay on your credit report for up to 10 years. Bankruptcy can adversely affect future housing and other credit related areas of your life. There are other ways to handle debt problems.

  1. The best is to pay off your debts on your own. Using the "snowball method" of debt elimination and a frugal lifestyle, you may be able to get out of your situation with few ill effects on your credit report. This takes discipline, but is the best way to go in the long run.
  2. Credit counseling is another possibility. Credit counseling agencies can get you reduced interest and reduce the pressure from bill collectors.
  3. There are other services that allow you to make debt payments you can afford into an escrow account. They will negotiate a reduced lump sum settlement with your creditors. (Takes 2-3 years)
  4. Chapter 13 Bankruptcy. When the new bankruptcy laws are in place, most people will be moved to this option. The court determines final settlement with your creditors. You make payments to the bankruptcy trustee.

All but the first option can have serious negative effects on your credit report. If you are going to buy a home or even purchase a car on credit, this can create problems for you in the future. Check out for more complete information on debt management.

Take the Next Step:

  • Learn more about surviving layoffs
  • Free Bankruptcy Advice (800) 379-0985 Is bankruptcy the solution? Call this hotline, made available by the nation's largest consumer law firm, for a free conversation to discuss whether debt relief under bankruptcy makes sense for you.

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