5 Questions to Ask Yourself Before Declaring Bankruptcy
People who experience overwhelming financial hardship may consider declaring bankruptcy. It’s a viable option for many who have undergone a significant illness and the accompanying medical bills, long-term unemployment, or for whom credit card debt has become unmanageable. However, it’s not always the financial clean slate that people may be expecting. When trying to regain solid financial footing, bankruptcy should be the last option, rather than the first. Here are several questions you should ask yourself before deciding to declare bankruptcy.
Have You Explored All Other Possibilities?
There are numerous options that can help you get out of debt that will have fewer implications to your future than declaring bankruptcy. If you’re struggling to pay medical bills, have you asked the hospital and your doctors about reducing payments or extending the payment terms? If you’re overwhelmed with credit card debt, have you gone through credit counseling (we offer it for free), reworked your budget and explored a debt management plan? Have you considered getting a part-time job or doing freelance work to supplement your income? These are all things you’ll want to consider before deciding bankruptcy is the only way to go.
How Much of a Difference Will It Really Make?
While personal bankruptcy will eliminate a good portion of your debts, there are some debts you will have to repay even after you file. You will still be responsible for paying back your student loans, making child support payments and paying any money you owe to the IRS, even after bankruptcy. If any of those are your biggest issue, consider other options to ease the burden and keep your credit report free of a bankruptcy.
Can You Afford It?
That may seem like a silly question to pose when talking about declaring bankruptcy, but it’s a valid one. Filing for bankruptcy comes with many costs, including paying an attorney to help ensure you’re filing correctly. While the final total depends on a number of factors, the total cost could exceed $5,000 or more. It may be smarter to put that money toward paying your debts and living expenses.
Are You Willing to Change Your Spending?
There’s no doubt having a number of stressful bills discharged in bankruptcy will lead to a feeling of great relief. However, that relief will be short-lived if you are unwilling or unable to change your spending habits and start saving more money. Bankruptcy should be seen as an opportunity to start over and do better, not an excuse to start living lavishly or spending more than you earn. If you declare bankruptcy as a result of significant credit card debt, you’ll need to change your spending habits or you could find yourself back in bankruptcy court again in a few years.
What Are Your Future Plans?
Chapter 7 bankruptcy — the most commonly declared type — stays on your credit report for 10 years. Though some lenders may be willing to lend to you as soon as two years after a bankruptcy, make no mistake; it will affect your ability to borrow at optimal interest rates, as well as make significant purchases, such as a vehicle or even a home. You need to take your future plans into account when determining if bankruptcy is the right choice for you.