Should You Consider Declaring Bankruptcy?

It can be difficult to know whether your debts are manageable or whether you might be better off financially by declaring bankruptcy.

Objective advice is hard to come by; credit counselors and debt consolidators usually make their money by persuading people to repay their debts, while bankruptcy attorneys typically make theirs by persuading people to file for bankruptcy.

Personal ethics and attitudes make a difference as well. Some people think there is little or no stigma attached to bankruptcy and are unwilling to cut back their lifestyles dramatically to pay off debt, while others would rather struggle with debts for a lifetime than renege on their obligations.

Bankruptcy can, of course, have serious and lasting repercussions. A Chapter 7, or liquidation, bankruptcy stays on an individual’s credit report for 10 years, which can make getting credit during that time difficult and expensive.

A Chapter 13 filing, requiring at least some debt repayment, usually stays on the credit report for seven years.

Either type of bankruptcy can affect your ability to get a job, rent an apartment or buy insurance. Employers, landlords and insurers increasingly use credit checks to evaluate applications.

There is no one-size-fits-all formula for determining whether bankruptcy is the best option. Richard Pittman, director of counseling for Consumer Credit Counseling Service of Los Angeles, said some debtors have managed to pay off credit card debts that equaled twice their annual incomes.

But John Balian, a bankruptcy attorney in Sherman Oaks, said he might recommend bankruptcy for someone with $30,000 in credit card debt and a $50,000 salary, particularly if the person had a substantial mortgage or children to raise.

Bankruptcy is rarely an option for people with adequate, steady incomes who could modify their lifestyles enough to repay their debts in three to five years, said Robin Leonard, an attorney and author of “Money Troubles: Legal Strategies to Cope With Your Debts” (Nolo Press, $24.95). A judge would probably dismiss the case, especially if the bulk of the debt was credit card or other consumer obligations.

And those who might otherwise qualify for liquidation but who run up debts buying luxuries just before filing might not be able to get those debts discharged, she said.

Bankruptcy may be unnecessary if you have little income or property to protect. Credit card firms and others who lent you money not secured by a home, vehicle or other tangible property have little recourse against you--though they can and will pursue deadbeats.

And bankruptcy may not help you much if most of your debts can’t be wiped out. Debts that can’t be dismissed in bankruptcy include child support, alimony, penalties for violating the law, most student loans and recent taxes.

For more information, see Leonard’s book, Stephen Elias’ “How to File for Chapter 7 Bankruptcy” (Nolo Press, $29.95), the American Bankruptcy Institute Web site at https://www.abiworld.org or a Web site run by consumer credit counseling agencies, at https://www.bankruptcy.org.