Gerri Detweiler has been helping consumers find answers to their credit questions for more than twenty years. She serves as Credit Advisor for Credit.com, and her newest book is Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts.
The prevailing view is that bankruptcy is always your last resort if you have debt troubles. While everyone I talk with doesn’t want to file for bankruptcy, thinking of it as a last resort can be a very dangerous way to approach it. A lot of people today are just hanging on financially by a very thin thread. When they wait too long to get help from a bankruptcy attorney, more often than not they make costly mistakes that could have been avoided if they had talked with an attorney sooner.
For example, a record number of people are either cashing in their retirement accounts early, or borrowing against them in order to pay their credit cards or other monthly bills. However, your retirement money in almost all cases is protected in bankruptcy. That means essentially you may be throwing good money after bad, and is especially true if you are just trying to keep the wolf away from the door, and you are not really in a position pay back your debts.
For example, one man I spoke with recently was going to use his retirement money to pay back his credit card bills. His plan was to borrow against his retirement account to consolidate about $40,000 dollars in credit card bills. What he didn't realize was that because retirement accounts require that you payback the loan in 5 years with equal monthly payments, the payment was going to be almost as large as his credit card bills each month. That meant that pretty soon he would have no credit card debt but a large monthly payment on his retirement loan. His budget was so tight; it was very likely he would run up his credit card bills again. In other words borrowing against the retirement account was probably going to result with him being in a worse financial position in a few months.
He really needed to talk to a bankruptcy attorney. But like most people I talk with, he didn’t want to. Very likely he would put off the tough decision, borrow against his retirement account, end up with more credit card debt, and then end up in bankruptcy anyway – and still have to try to repay the retirement loan.
There’s a common myth these days that because bankruptcy laws were changed a few years ago that many people can’t file for bankruptcy because they make too much money, or that it is too difficult for them to file bankruptcy. That isn’t necessarily true. The only way to find out whether bankruptcy is a viable option for you is to talk with a bankruptcy attorney who can evaluate your situation and tell you the pros and the cons.
Another hurdle that keeps people out of bankruptcy court is their worry over what will happen to their credit rating. They are so afraid of damaging their credit that they continue to dig the hold deeper in a futile effort to keep their "good" credit rating.
Yes, your credit rating is important, but your financial health is even more important. Sometimes that means you need the help of the bankruptcy court in order to get out from under crushing debt.
I don't mind if you do everything sensible you can to avoid bankruptcy. But stop thinking of it as a last resort, and get help if you need it.