If I can’t pay my bills, am I really forced into a bankruptcy? That’s what my credit counselor told me because I don’t qualify for other programs. But I can’t believe bankruptcy is all I have going for me. I’m 52. — Frank
There is no such thing as a “forced” bankruptcy. While your credit counselor may have believed that discharging your debts is a reasonable course of action, the choice is yours to make.
Overall, nonprofit credit counseling agencies are terrific organizations. Among other services, they provide free budget and debt counseling appointments to financially stressed people. During your session, the counselor likely reviewed your income, expenses, assets and liabilities. She also should have asked about the root of your money problems and what you hoped to gain from the appointment.
Based on your responses, as well as an analysis of your current and future capabilities, the counselor developed an action plan. It sounds as though Chapter 7 bankruptcy was your counselor’s recommendation. But why? You must fit the criteria for this type of legal protection, at least on the surface. It had nothing to do with your age, and everything to do with your financial situation.
For example, you likely have debts that you can’t pay off – not just now, but in the foreseeable future. Furthermore, the majority of your debts must be unsecured, such as credit card bills, medical or utility bills, or accounts in collection. These unsecured debts aren’t collateralized by property (such as a car or home), so they can be wiped out in a Chapter 7 bankruptcy. With bankruptcy, you would no longer be responsible for paying these unsecured debts, and you could use whatever funds you have for living expenses and to pay any other remaining liabilities.
The question remains: Why wasn’t a debt repayment program one of your counselor’s recommendations? The answer likely is that such a program must not have been right for you.
Debt management plans are appropriate only for clients who can afford them. You would need to have sufficient cash coming in on a regular basis to cover your necessary expenses and at least enough (but not much more) for your creditors’ minimum payments.
I completely understand why you would have a negative reaction to the word bankruptcy. Many people equate it with personal failure, and a Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date.
However, bankruptcy can be a sensible decision.
If attempting to repay your creditors will cause harm and discharging debts will help, mull over bankruptcy. Consider what might happen if the companies don’t get what they’re owed. Your creditors can (and usually will) ramp up collection action with demanding phone calls and letters. The companies also may sue you for the amounts owed, and then they might be able to garnish your paychecks or claim funds from a bank account.
However, if you’re not working and have no assets for your debtors to take, you may be able to avoid lawsuits – as well as the bankruptcy – by letting them know that their collection efforts will be for naught. They can’t take what you don’t have.
Please don’t take offense at your credit counselor’s bankruptcy suggestion. I’m sure your counselor mentioned bankruptcy because she believed it might be in your best interest. Whether you file or not is your choice.
Erica Sandberg is editor at large for Bankrate Inc.‘s Credit Card Guide, advice columnist and reporter for CreditCards.com, and blogger for The Credit Solutions Program. She’s the author ofExpecting Money: The Essential Financial Plan for New and Growing Families and host ofAdventures with Money, an interview-format podcast which covers all the ways people can live well, no matter how much they earn owe, or own.