Bankruptcy is a powerful tool for financial rebirth, and one that never should be viewed only as a last resort. But do the benefits outweigh the disadvantages? Too many people comply with the advice of less-than-objective debt counselors and sincere-but-ignorant friends, parting with essential assets like their homes and pensions, only to wind up in bankruptcy (where those kinds of assets may have been protected) anyhow.
Bankruptcy isn't necessarily the best solution for you. Filing bankruptcy has definite downsides, and sometimes a different strategy is more appropriate for your situation or your personality. Take a look at some of the pitfalls of bankruptcy and alternatives such as using your home equity or pension to pay your debts.
Choosing which bills to pay first (if at all)
Amid all your personal financial turmoil, debt collectors give you crummy advice because all they care about is wringing as much as possible out of you, as soon as possible, and with the least amount of effort on their part. Your decisions must be based on reason and guided by what's best for you and your family and not on what makes for a happy debt collector.
Keeping that perspective when a bill collector is bullying you isn't always easy. Remember, however, that the most obnoxious collectors act the way they do because they really don't have any other weapon to use against you.
It is hoped that you plan to talk to a bankruptcy lawyer before making these decisions, but if you're not quite ready to take that step, you may want to start by asking yourself two questions:
- What can this creditor do if I don't pay?
- Will I be able to escape this debt altogether if I eventually decide to file bankruptcy?
When you can't pay everyone, you need to invest your money where it does the most good or avoids the gravest of problems. Dribbling out money to the most aggressive collectors without an overall plan is a mistake. The payments at the top of your priority list (in order) should be your:
- Rent, or mortgage, if you intend to keep your house
- Fines, if nonpayment would land you in jail
- Child support and alimony
It's no accident that credit cards, loans from finance companies, and medical bills don't make the cut in this list. That's because these types of creditors must sue you and obtain a judgment before they can take any of your property. Besides, these kinds of debts can be wiped out if you end up in bankruptcy.
Deciding whether to pay your mortgage
Although you'll probably want to make your mortgage payments if you decide to file bankruptcy, it isn't necessarily a given.
Whenever your home is worth less than what you owe on it, you may just want to save the money for a deposit on a new place to live, knowing that eventually the mortgage holder will foreclose and kick you out anyway. However, if you intend to keep your home, be sure to maintain insurance and pay real estate taxes. If you don't, the lender may be able to foreclose even if you're making your payments.
Considering car payments
As is true with your house, the question to ask about your car is whether it is worth less than you owe on it. You'll have to make your car payments if you want to keep it. And even if you decide to surrender the vehicle, your problem may not be cured. Most car dealers sell surrendered vehicles at wholesale prices, leaving you liable for any balance due on the loan. Try selling the vehicle yourself to raise enough to pay the loan in full and satisfy the entire obligation.
Dealing with alimony and child support
The consequences for neglecting those obligations are serious, possibly even criminally serious if you're jailed for contempt of court. Many judges have adopted a zero-tolerance approach toward deadbeat parents.
Deciding whether you should pay your taxes
You need to pay current income taxes, and probably those from the last three years. Taxing authorities can make your life miserable if you don't, and penalties for not paying add up at an astonishing rate.
Negotiating with your creditors
If you can find someone who actually has the authority to negotiate, you may be able to cut a deal that works to everyone's satisfaction. But if your creditor is a large institution, you'll have difficulty getting beyond the bean counters and paper pushers; that is, if you even get past the answering machines. You're more likely to succeed if your creditor is a small organization. Regardless, attempting a nonbankruptcy solution is worth the effort.
If you genuinely are considering bankruptcy, unsecured creditors may agree to settle for a pittance simply because when you do actually file they'd otherwise receive nothing. The success of this kind of strategy depends on convincing your creditor that you're truly prepared to file bankruptcy. The best way to accomplish that is to hire a well-known bankruptcy specialist to handle the negotiation. That way, the creditor knows that you're serious. But, don't ever bluff or threaten bankruptcy unless you're truly prepared to turn in that direction.
Considering credit counseling services
You can find a number of outfits that offer credit counseling. Consumer Credit Counseling Services is the most common. CCCS offices are local nonprofit debt-counseling outfits, numbering about 1,300 and joined under the National Foundation for Consumer Credit.
CCCS acts as an intermediary between you and the creditors, often getting late fees dropped and wage garnishments revoked. Typically, you and the CCCS counselor devise a repayment schedule, and then you make regular payments to the CCCS, which forwards the money to the creditor.
Creditors pay CCCS a commission on the funds that it collects. Because of this commission, some people claim that CCCS is nothing more than a glorified bill collector. Nevertheless, fees charged to consumers are fairly nominal and usually under $25 a month. Sometimes CCCS even renders its services for free. To find a CCCS near you, call the main office at 800-388-2227 or check out the National Foundation for Consumer Credit Web page.
 | Although some organizations like CCCS offer valuable assistance, they're also allied with creditors and have an institutional bias against bankruptcy, even when it's in your best interest. |
Some counselors are very good and, if a person's situation is truly hopeless, they immediately refer that person to a competent bankruptcy attorney. On the other hand, some counselors think that talking people out of filing bankruptcy is their duty. They vigorously push repayment plans, which often are doomed to fail. Additionally, they often fail to have the principal amount of your debts reduced and don't help much in extending payments on secured debts.
 | If your problems primarily are medical, consider Health Allies — a company that specializes in arranging payment plans for medical and hospital bills of all kinds. |
You can also check your local phone book for debt counselors, but be very careful. Some are nothing more than marketing fronts for companies trying to lend you more money.
Ignoring creditors
Sometimes doing absolutely nothing makes perfect legal and financial sense, but using that tactic needs to be a conscious and intelligent decision that is not a result of your refusal to face the music.
Whenever you live simply, have little income or property, plan to maintain that lifestyle indefinitely, and don't give a flip about your credit rating, doing nothing may just be the wisest course. You can't go to jail for failure to pay debts (other than support obligations and criminal fines). Creditors can't strip you of basic necessities, such as clothes and food. A good part of your income, as well as Social Security benefits, welfare, and unemployment are inaccessible.
You can be sued, of course, but even bill collectors can't extract blood from a turnip.
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