Deciding to file bankruptcy can be tough. You are faced with two unappealing options: pay back your debts or obtain relief from the bankruptcy court and starting over.
In order for you to make the decision, you need to weigh your options and possible alternatives. Can you dodge bankruptcy on your own? To see if this is possible, create a budget for your monthly expenses for the way you are currently living. Include mortgage and car payments, but exclude all other existing debt service.
After paying your current living expenses, do you have any available money leftover that you could use to pay off your debts other than car and house at the current interest rates? If so, can you do this within three years?
Tip: Don't explore this option by basing your payments off minimum monthly payments, figure out what it will really take to pay off your credit cards at credit card interest rates.
Is it possible that you could reduce current expenses, increase income, negotiate lower rates or sell certain assets to make avoiding bankruptcy possible?
Retirement savings off limits...
If you are thinking about resorting to liquidating IRA's or 401K plans to pay off creditors, make sure you have thought about this long and hard.
Often, these assets are protected by law from collection actions by creditors. Once they are spent, it is not easy to restore these savings. More importantly, using these savings to pay creditors may even create new debt for you. Possibilities of new debt created could be in the form of penalties for early withdrawal or income taxes.
Can you avoid bankruptcy with outside help?
If paying off your debt within three years on the present terms is not possible, there are non-profit organizations that may be able to help reduce your debt, such as Consumer Credit Counselors.
These organizations will help you negotiate a repayment plan or reduce interest rates. Generally, collection actions will cease against those who participate in these types of plans. Just make sure you do plenty of research on any organization you choose to work with - some have poor reputations and can end up costing you more in the long run.
This option usually works best if your debt is primarily from high-interest credit cards.
If these alternatives are not achievable for you, consider bankruptcy.
Unfortunately, there is no set formula that will tell you whether bankruptcy is your best choice. Before you finalize this decision, contacting an experienced bankruptcy attorney is always a great idea. Most attorneys (us included!) will offer a free consultation to discuss your options and help you make an informed decision.