Bankruptcy is a serious decision with long-lasting implications. It is not something you simply declare, notwithstanding the following attempt:
Bankruptcy is an important and emotional decision.
You: Should I declare bankruptcy?
Probably not.
You: Why not? I have an unbelievable mountain of debt.
I’m sorry that you’re struggling. While it’s possible bankruptcy may be the only way out for you, it is critical to understand that bankruptcy is your last choice. Bankruptcy is not the silver bullet that will get you out of a financial hardship. Rather, it formalizes your previous mismanagement for life. Therefore, bankruptcy is something you choose only when you have exhausted all other options, not something you run to first when you conclude you can’t make ends meet.
You: How do I know if I’ve exhausted all other possibilities? I mean, I’ve been trying to get out of debt for a long time and I’m just not making any progress.
I get it. You’re living paycheck-to-paycheck. You’d rather live Beyond Paycheck to Paycheck, a better choice to be sure. The first thing you must ask yourself is:
Are You Prioritizing Your Debt?
You: Of course I am. If I wasn’t paying it, I wouldn’t be having any problems and I certainly wouldn’t be asking about bankruptcy.
I’m not talking about making your debts a priority. Rather, do you prioritize certain debts over others?
You: I pay what I can afford when the bill is due.
That’s a common approach. However, paying your most expensive debt first greatly increases the speed you become debt-free. Furthermore, the total amount of interest you pay over the life of your various loans is significantly less when you prioritize your debt.
You: How do I prioritize my debt?
By paying the most you possibly can against the debt that charges you the highest interest rate – that’s your most expensive debt. Pay the minimum payment required on all the remaining bills. Following this path guarantees you that, for the rest of your life, the next month will be your hardest financial month. The month after it will be a little easier. Then, slowly, like a hamster on the hamster wheel, debt repayment will become easier and easier as more of your hard-earned money goes towards paying down your debt principal and less to interest expense. Remember, interest expense is the biggest suck of your paycheck.
You: Biggest “suck?”
Yes, because the interest expense sucks your money and you get nothing for it! You don’t get any good or services for the payment (you got them a long time ago) and the interest payment itself doesn’t reduce your debt. You’ve got to get your interest expense down. Once you do so, then you can begin to save.
If you can’t seem to make the numbers work even after prioritizing your debts,
Call Your Creditors
See if you can work out an arrangement.
You: An arrangement?
Sure. For example, they may be able to provide you with a longer repayment term or a lower interest rate, both of which mean lower monthly payments. Note: you prefer the second option over the first, since a lower interest rate means you’ll be paying less total interest over the course of your loan, whereas a longer term means you’ll eventually pay even more interest than you’d pay on your current loan agreement.
If, after making those calls, you still can’t pay your bills, it’s time to:
Work with a Qualified Credit Counseling Agency
Find a qualified credit counseling agency, preferably one available through your state at no charge.
You: No charge? Get out.
Seriously. Here’s the credit counseling agency offering free services to residents of New Hampshire, where I live.
Remember Saving Strategy # 4: Enjoy Free stuff: Meet with a counselor, who will review your income and expenses and recommend a course of action.
If you and your counselor conclude there just isn’t any way to survive without declaring bankruptcy, then do so.
You: I won’t need to.
I didn’t think so. But just in case someone else does, I’ll be continuing this conversation next week, discussing Chapters 7 and 13.
You: Of your new book?
No – of the bankruptcy code.
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What’s your take? Anybody think about declaring bankruptcy but then decide not to? Anybody declare and wish they hadn’t? Do share.
Tags: bankrupt, bankruptcy, credit counselor
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