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What other options should I consider before filing bankruptcy?


The first thing to do is to sit down write out a budget (which is actually the first thing that I do when you come in to see me). I usually take about two hours with you, but if you do it yourself the process should take a few days. If you have access to a computer, there are programs such as Quicken that do a very good job of setting up and tracking a budget. Or someone at the public library, or your bank or credit union or church may have a computer program, or a set of forms that you can copy.

All you really need to set up your budget is a pencil and some paper. Try to guess how much money you will have coming in over the next year or so, including earned income, tax refunds, and regular payments from disability, retirement, unemployment, etc., and any other source. Then make your best guess about how much money you are going to have to spend for household expenses such as rent or mortgage, car payment(s), food (both groceries and eating out), utilities, phone (home phone, cell phone, pagers, etc.), cable or satellite service, Internet service, laundry, taxes, insurance, school books, tuition, day care, prescriptions and medical expenses that are not covered by insurance, and anything else that you have to spend money on. Be sure to include everything that you actually spend money on, even alcohol and tobacco. But also remember that you are making a budget, and the main idea is to keep your expenses down.

For your primary budget analysis try to distinguish between "debts" and "expenses," and only consider your expenses. Don't even think about paying down debt until you are certain that you can afford the basics. Of course, there are some things that might fall into both categories, so for this test things like unsecured personal loans, credit cards, past medical bills and even judgments that have been taken against you would fall into the "debt" category, so would not be considered yet. Your mortgage(s) and car note(s) would be considered "expenses," (assuming you plan to keep that house or car).

Set it all up on a monthly basis. (Note: There are four and one-third [4.333] weeks in an average month; 52 weeks divided by 12 months = 4.333.) Then, subtract your average monthly living expenses (not including your debts) from your monthly income. If there is nothing left over, then you have a problem. Either your expenses have to be reduced, or your income has to increase, or both. On the other hand, this might answer the question as whether you would qualify for Chapter 7.

If there is some money left over, then make a plan for using that extra money to pay your other creditors. It is not easy to decide who gets paid first, but I like to focus on two things first: the smaller bills; and the creditors that have the most leverage over me (e.g. higher interest rates, credible threat of lawsuit, or already took a judgment). By paying the smaller things first, you can get rid of a few small creditors pretty soon, and actually see some progress. You should also give priority to the creditors that charge the highest interest rates, or to those who are threatening to sue you or have already sued you. Those are the bills that can grow the fastest, so you will be getting the most out of your money by paying them first.

If you can get a second job, or a job paying more money, do it. You might be amazed at how much difference a few hundred dollars per month can make. But don't kill yourself or ignore your family just to try to pay down debts, or to keep a house or a car. Those are just things, and are not important in the long run. (Or as a wise man once said, "Don't love anything that cannot love you back.") Also, the recent amendments to the Bankruptcy Law force you to count all income from the past six months. I have seen too many people who worked two or three extra jobs, trying to make ends meet, only to find themselves exhausted, still in the same boat, and unable to file a Chapter 7 for six months because that extra income (that they no longer even have) is preventing them from qualifying for bankruptcy.

You may want to consider borrowing money from family or friends. If you are sure that you can pay them back, and pay back all of your other debts over the next few years, then do it. Do not borrow against the equity in your home just to pay debts without talking to a good bankruptcy lawyer first. There are times when that is exactly the right thing to do, but there are also times when you just end up with two house notes that you can’t pay. Bankruptcy allows you to protect a certain amount of equity in your home (between $5,000 and $50,000 or more, depending on several factors), so in many cases you can get rid of the debt and save the house at the same time.

Most importantly, don’t try to borrow your way out of debt unless you are absolutely certain that you can pay it back. Oftentimes people simply dig a deeper hole by borrowing more money than they can pay back. Be especially careful about borrowing money from your retirement plan. The money that is already set aside in most retirement accounts is completely protected in bankruptcy, even if it's more than $1,000,000.00, but once it comes out of that retirement account it is no longer protected. (Sample horror story: Before talking to me, a client cashed out his 401k, and used that money to buy an expensive truck that he planned to use for his new business. If he had filed the chapter 7 first, that retirement account would have been completely protected, and he could have cashed it out later and used the money for any purpose at all. Nut by cashing it out prematurely he had to choose between losing his new truck or discharging his debts. Moral of the story: Talk to me first.)

You might consider credit counseling or debt consolidation, but read the warnings in the FAQ right above this one. If you expect to have more money coming in soon, you should call your creditors directly, and explain the situation to them. If you call the creditors before they start calling you about missed payments, then they are more likely to work with you. But understand that if you are behind on your payments, when you call them they will automatically turn you over to their collections department. Those are not the nicest of people.

Bankruptcy is a very serious step, and it should not be taken casually. There is almost nothing worse to have on your credit record. On the other hand, if it’s the right thing to do, there is no sense in putting off the relief until later. Here's a question to ask yourself: If I don't file bankruptcy now, where will I be in 5 years? If you have a realistic chance of working your way out of debt (or at least significantly improving your situation), then you should not file bankruptcy without another very good reason. But if you expect to be in the same position, or worse, five years from now, then you should seriously consider bankruptcy as an option for getting maters under control.