Many people don’t think about filing bankruptcy, because they feel they’re getting by or that their debt load isn’t too big. Once they speak to an attorney, they begin to see they have a choice between “just getting by” and getting a fresh start that lets them rebuild their finances.
Bankruptcy isn’t always the best option for everyone. Sometimes budget changes may be enough to solve their problems. Each case is different.
Here are some factors that can help you decide whether bankruptcy is a good choice for you.
It may not be obvious whether you have too much revolving debt, because “too much” can depend on what your income is. In general, if your credit card debt is under $10,000, you have better options than a bankruptcy. Even with a higher number, you may be able to make the minimum payment each month without too much trouble.
But the high interest rates of revolving debt can hide a deeper problem. Many times, paying the minimum is basically treading water, because your actual debt barely goes down at all. You can spend years essentially working for your credit card company, sending them money each month but not making progress. If that’s the situation you are in, bankruptcy could be a good option for you. It will allow you to spend your money on improving your life, and the lives of your family, rather than spending it on interest on your debts. Even if you don’t feel stressed out by your revolving debt, if you are just treading water, bankruptcy may be a good option.
A creditor can take a large chunk of your paycheck to pay toward your debt through garnishment. If a creditor has started a lawsuit, unless you take action, a garnishment could soon be coming. With a few exceptions, bankruptcy will stop the legal action against you. Even if your total debt is under $10,000, a garnishment can make it hard to pay for your basic living expenses, and a bankruptcy may be appropriate.
In some cases, financial problems can be addressed by better spending habits. There are many theories on the best way to do this, but a simple evaluation tool is useful. To have financial stability, ideally you should be spending up to 50% of your net (after tax) income on fixed expenses like rent, mortgage, car payment, insurance, food, debt payments, and other things that you can’t really do without. Another 30% should be for discretionary spending, and 20% should be saved.
For many people, fixed expenses are a much higher share of their income, but these numbers should be a goal. When your fixed expenses are too high, you won’t have savings or discretionary spending that can be reduced to cover any emergency that comes up. If your discretionary spending is too high (due to eating out a lot, for example), you might be able to shift some of your spending towards paying off your debts, allowing you to avoid bankruptcy.
Whether or not to file bankruptcy is a serious decision, and you should speak to your attorney about your specific case. However, if you aren’t sure if bankruptcy is a good choice for you, you should schedule a no-cost consultation to at least discuss the issue. Your attorney will be able to help you make an informed decision about the best way for you to proceed.