Return to Main PageThe Debt Adviser by
Steve Bucci Bankrate.com
Q. Dear Steve,
I have been out of work for a while and I've been unable to pay on my debts. I'm considering bankruptcy to get a clean slate and start anew. What would be the best plan of action?
-- James
A. Dear James,
The timing of your letter is good. The Senate has just passed a bankruptcy reform bill that is expected to pass the House and be signed by the President very soon. The reforms to existing bankruptcy legislation will make it more difficult to qualify for bankruptcy protection. Other changes in the bill could complicate the matter for some people.
Let's see if you are good candidate for bankruptcy before we get into the nuances of the bankruptcy legislation and its potential effect on you.
You say you can't pay your bills because you are out of work. This alone tells me that you should not consider bankruptcy right now. Let's say you filed for bankruptcy tomorrow. Yes, all your outstanding unsecured debts would be wiped out. But next month, you would still have living expenses and without work, your income may not be enough to cover them. So what happens then? Bills pile up, they can't be paid, and you will have used up your bankruptcy "bullet."
Also, as you are looking for work, the bankruptcy may become an impediment to finding jobs in certain areas. Professions that require licenses or security clearances often have a prohibition about recent bankruptcies. So based on these two considerations, you would probably be better served to consider filing only after you have found a new job.
I believe bankruptcy should be a person's last option after all other alternatives to get out of financial trouble have been ruled out. Other options include increasing your income or cutting expenses to help pay down your debt. Of course, in your situation the reason you are in your current circumstances is because you don't have a job to bring in income. However, cutting expenses is an option even if you are living on unemployment. I know this from personal experience. Earlier in my career, I was out of work for more than a year. It isn't fun.
The next option is to contact your creditors and see if you qualify for a hardship program. As someone who is unemployed, you may well qualify to get enough relief, which in conjunction with expense cuts, may allow you to make it until you can find employment and begin to make payments again.
Another solution may be to contact a credit counselor to help you determine if bankruptcy is the only answer for you. This will become a requirement before filing under the new legislation.
If you decide that bankruptcy is the best solution for you, I recommend you discuss your situation with an attorney before October of this year, when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 will likely become effective. Below are some of the provisions included in the act that could potentially impact your decision-making:
· To qualify for Chapter 7, in which debts are forgiven after forfeiting some assets above a certain level, you will have to undergo a bankruptcy means test. If your income is greater than the median income for your family size in your state and you can pay at least $6,000 over five years or $100 a month, you will be required to file under Chapter 13 which requires you to repay at least a portion of your debts.
· You will have to pay the full amount owed on your car loan regardless of the condition of the car, as opposed to paying only what your car is worth under the current law.
· Bankruptcy attorneys must certify your financial statements to the court and will be held financially responsible if the statements are false, which means attorneys may charge more. To sum up how the new legislation may affect you: It will be more difficult to erase your debts unless you are in really dire straits; you may have to pay more for an attorney; and you will have more to pay on certain debts, especially car loans.
My advice is to determine if bankruptcy is really your only option and if it is, do it when it actually solves more problems than it will create. When it comes to personal finance troubles, there is no magic wand and no free lunch.
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