Almost all of us will experience debt problems at some point during our lifetime due to a financial crisis such as a job loss or due to our own devices. Some individuals cause debt problems for themselves through poor spending habits, abuse of credit cards, gambling, co-signing loans for others or because of a failure to budget and manage money well. Because they feel their debt problems are due to something they did or failed to do, they may wonder, “Is personal bankruptcy a good option for me?”
Let’s look at each of these common “causes” of financial trouble a little more carefully to determine if bankruptcy is a good option to solve the problem.
Is Personal Bankruptcy A Good Option If You…
Have poor spending habits?
We all experience this occasionally when we confuse wants with needs; however, for those who chronically spend money without first paying bills, it can quickly result in a financial crisis. Borrowing from “Peter” to pay “Paul” catches up with you and you’ll find yourself behind on major bills like mortgage loans and car loans. When this occurs, you will be dealing with a repossession or foreclosure sooner than you realize.
Bankruptcy, Chapter 7, can offer you a fresh start by eliminating unsecured debt altogether. Or, through setting up an affordable repayment plan in a 3-5 year Chapter 13 bankruptcy you can cure mortgage and vehicle arrears and pay a portion of your unsecured debt; the remaining unpaid unsecured debt gets wiped out (or discharged), tax free.
Have abused credit cards?
Credit cards are not inherently evil, but they are a problem when they are abused. When a credit card is used for a purchase, it is easy to fall into a pattern of buying items that you cannot afford because no “money” leaves your wallet. In other words, there is no immediate monetary consequence for the purchase. It is almost as if you are receiving a free item until the bill comes at the end of the month.
Then after only one or two late payments, the interest rate increases and your minimum monthly payment doubles. As you struggle to pay the minimum payments, the balance owed never decreases because most of your payment is applied to interest. Another problem is using one credit card to pay another credit card - - you are borrowing money to pay interest making your debt problem worse. Many reach a point where it would take decades to pay off their credit card debt when only making minimum monthly payments.
Personal bankruptcy can help you by wiping out credit card debt to give you a start fresh with a better understanding of how to use credit cards wisely.
Have a gambling or other addiction?
Gambling and other addictions can create debt problems because money earmarked for bills is used to pay for these habits. Even though you may feel these debt problems are your fault, bankruptcy can still help you.
The Bankruptcy Code does not require that you are completely innocent with regard to your debt problem to receive help. A bankruptcy case in conjunction with counseling to overcome the gambling addiction can help you get back on your feet.
Co-signed loans for others?
It is only natural to want to help friends and family when they need assistance to qualify for a loan; however, this causes a problem when that friend or family member fails to make the payments on the co-signed debt. You become responsible for repayment of the loan as the co-signer. While you may not have had debt problems before you co-signed the loan, adding an unplanned monthly payment could cause a financial burden you are not able to handle.
Furthermore, the creditor could sue you, as the co-signor, to collect the debt if it is not paid.
Bankruptcy could be an option for resolving this problem; however, you should consult a bankruptcy attorney to discuss how filing a bankruptcy case would affect your other debts and assets.
Failed to properly budget your money?
Many people live paycheck to paycheck without creating a budget to know where their money is going each month. Having a monthly budget helps track how you spend your money so that “holes” can be plugged before a financial problem becomes too big to handle. When you spend more money than you make, you begin borrowing money to make ends meet each month and before long you are carrying more debt than you are able to pay. Through the bankruptcy process, many debtors learn how to create budgets that help them avoid re-creating the debt problem again in the future.
Some financial problems are so severe that bankruptcy is the only option available to solve the debt problem. Bankruptcy law does not discriminate against a debtor who feels that it is their “fault” that they are in financial trouble. The truth is that most Americans are living one or two paychecks away from a bankruptcy, whether it is due to circumstances beyond their control or because they failed to manage their finances better.
Is personal bankruptcy a good option in either of these cases? Yes, in most cases, filing a bankruptcy will help a debtor overcome their financial problems so they can get a fresh start. Through required credit counseling and debtor education courses, most debtors come out of bankruptcy with a better understanding of personal finances and improved money managements skills.
Learn more about the bankruptcy process and options available to you:
