Bankruptcy: The last option
By Jan Lindsey
As distasteful as bankruptcy is, it holds a legitimate place on the list of options available to those in financial trouble.
“Broadly stated, I would say it is the right answer when it is financially or emotionally impossible to continue,” said Gail Cunningham, vice president for public relations at the Maryland-based National Foundation for Credit Counseling.
“All the things we taught people to do all these years have now backfired on them,” she said. People who did the right thing – putting money down on a house, investing for retirement, establishing credit – are now being hurt by a struggling economy.
Cunningham notes that there have been news reports about people committing suicide to escape a financial failure and says, “It is simply not worth it. Get out from under the burden.”
Still, she says, debtors have to make sure to exhaust other options before entering into a bankruptcy. Cunningham suggests an orderly approach.
First, she says, gather everyone in the family who spends money – yes, even the children – around the kitchen table and have each person pledge to record every penny they spend for 30 days. Don’t forget to record the bills you pay.
If you think this is a silly exercise, Cunningham said, realize that less than 42 percent of Americans keep close track of their spending and 6 million don’t know how much they spend on food or entertainment.
“You can’t know where you are going until you know where you are,” she says. It’s “no fun, but you can do anything for 30 days.”
What you will end up with is a realistic view of what you spend each month. Now, where can you cut? What can you do? Have a pizza delivered once a week instead of twice? Drop the extra cable television package you rarely use? Replace a cell phone plan that has you paying for services you don’t need? Stop a gym membership that is being charged to your credit card every month even though you haven’t set a foot in the place in a year?
“Cutting back is better than cutting out because you are not adjusting lifestyles so much,” she said. In other words, don’t stop ordering those beloved pizzas, just do it less often.
There is one thing, however, that needs to come to an immediate halt. “Stop charging,” Cunningham says. “If you dug a deep financial hole, stop digging.” For some, this 30-day effort and the resulting changes may be enough to fix the problem.
If you think things will be tight but you can adjust spending enough to handle it, Cunningham suggests paying your bills in this order to protect your household:
- Rent, food, utilities, insurance, medical care
and child care
- Secured loans, such as car payments
- Unsecured debt, including credit cards
But, if you think all the spending cuts in the world won’t fix the problem, you will need another solution: Can anyone in your household take on another job to make enough money to plug the hole? Or do you have anything you can sell. Do you really need that second car, the boat in the side yard, the vacation home? Use the revenue from any sale to pay off debt.
At this point, if you haven’t been able to shove yourself back from the cliff, it is time to see a certified credit counselor, Cunningham says.
“You can be just too close to it or too financially distraught” to get a clear view of the situation, she says.
The National Foundation for Credit Counseling is an association of nonprofit credit counseling agencies. You can get in touch with a counselor by phone or e-mail, or in person. Visit
nfcc.org for contact information.
Cunningham says NFCC agencies receive funding from the federal government, foundations and creditors, so the cost to you is minimal -- or zilch. You will not be refused service because you can’t pay.
A credit counselor will go over your finances with you. Cunningham says that -- if you are correct that your budget is too out of whack to be wrestled back into form -- you will basically have three choices: a debt settlement or debt management plan or bankruptcy. To see how your credit history will be affected by the choice you make, go to
How credit history and credit scores work.
The counselor will be able to advise you on the most suitable choice for your circumstances.
- A debt settlement plan is anagreement youstrike
with your creditor to pay a portion of what you owe
in exchange for the creditor’s forgiving the balance
of the debt. There are companies that advertise debt
settlement services, but they charge start-up and
monthly fees and generally will not get a better deal for
you than you will get by dealing directly with your
creditors, Cunningham said.
- A debt management plan can be worked out by the
credit counselor, who will negotiate with your creditors
to have fees stopped or reduced and payments dropped
to a level appropriate for your income. “It’s called a
workout plan,” Cunningham said, and it will require that
you have your debt fully paid off in five years. A credit
counselor will not set up a debt management plan for
you unless you will be able to meet the obligations it
imposes over the long haul.
- Bankruptcy is the least attractive option, but if your
situation requires it, your credit counselor will tell you
so, Cunningham says. The bankruptcy law changed in
2005 to, in part, to require that debtors receive credit
counseling from a federally approved provider before
filing for bankruptcy. If a credit counselor determines
that bankruptcy is your best course, the counselor will
give you a certificate that you can take to a lawyer to
being the process. Bankruptcy petitions are decided in
federal court and can involved either dissolving or
reorganizing your debt. In some states, things like a
personal home – one with a homestead exemption –
cannot be taken to satisfy debts. The purpose of
bankruptcy is to provide a clean slate for a fresh start.
“When you file for bankruptcy, at some point down the line, you’re going to start beating yourself up over it,” Cunningham said. It’s good to know it was the right thing to do.