It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.
I am considering declaring bankruptcy but I’m unsure of all the ramifications. I’m only 24 so I want to make sure this is the only option I have before I move forward. I am in debt with credit cards approximately $23,000. I was on a debt management program for a while, with a 0% interest rate, and was able to take care of about $6,000 of it. The monthly payment was so high and I began to fall behind on other bills — almost had my car repossessed. That’s when I decided bankruptcy might be my only option. Since I stopped paying the debt management company, I’ve been contacted by the collections agency for Amex to settle at $10,000, instead of $15,000, with a low monthly payment of $200. I am considering taking that offer but am nervous I will wind up in this same position down the road – not being able to make all my monthly payments. Should I call a spade a spade and declare bankruptcy?
–Kacy, Los Angeles, CA
STRAIGHTFORWARD ANSWER: Maybe, but probably not.
More detailed explanation
Let me make one thing clear right at the outset: Declaring bankruptcy is what you do if you have no other choice. Kacy, some introspection on your part is likley warranted here. What caused you to get into this predicament?
You: I spent more than I made.
Of course, but why? Was it because you had poor financial habits? Did you become disabled or lose your job and have fixed expenses you were unable to eliminate rapidly enough to avoid adding major debt? Were there high one-time uninsured medical expenses?
You: Why does that matter? I’ve got $23,000 in credit card bills alone. Twenty-three grand is twenty-three grand.
Only by understanding the true cause of your debt can you chart your best course of action going forward. If you have the confidence to pay back your debts because of new steady income and an appreciation (actually dedication) to living below your means, you should negotiate like heck to get as much of your debt reduced as possible, the lowest possible interest rate, and then pay it off aggressively.
If, on the other hand, you have been out of work for a lengthy period of time, see no prospects for employment, and have enormous expenses you can’t reduce (such as ongoing medical expenses, childcare, etc.) bankruptcy may be your only option. But only go there after much deliberation.
Bankruptcy has significant negative ramifications inlcuding:
- Noted on your credit report for 7-10years (and yes, many companies will request your credit report before hiring you).
- Not all debts go away (student debts, taxes, alimony and child-support, for instance are hardly ever wiped clean from what you owe).
- You may have to sell everything you own – including your home and car.
- Bankruptcy is not the final chapter in your financial saga. It’s just the next one. Many people are not better off after declaring bankruptcy (and remember, things are pretty bad if they declared bankruptcy so it’s a pretty low threshold). This is primarily due to people’s failure to eliminate the causes of what caused the bankruptcy in the first place.
Here is some related reading about bankruptcy. In addition, check with your state about free credit counseling.
Bankruptcy is an option, but typically not an ideal choice. If you can find a way to pay down your debt, do so – negotiate aggressively on the amount owed, the rate charged – then do whatever you can to get in front of this train. Remove the causes (whether it be temptation or something you already own or lease that is bleeding you).
Raise your income, even if that means a second job. You’re just 24. If you’re in good health with marketable skills, you can certainly turn this ship around – quickly too, if motivated! A lofty financial future may well be within reach. Go get it.
“personal finance” 
“financial education”
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