Per the title. I would like to discuss the financial implications of declaring bankruptcy, not the moral ones. I *can *pay back the debts, the interest rate is between 9-21.5%, assuming I keep my job.
And I thought about it and I wondered…would I really lose $25,000 over the next 10 years if I *were *to declare bankruptcy?
I mean, just what *are *the consequences, and are they worse in dollar terms than paying off the debts?
Again, please don’t make this sound like I want to do this, I am just wondering aloud if “paying my debts” *actually *pays off more in dollars and cents terms than reneging on them…
The very first consequence I can think of is that you will absolutely destroy your credit rating for years. The only loans or credit cards you’ll be able to get will have absurdly high interest rates. If you marry during that time, your spouse’s credit rating could take a hit, as well.
Unless you can live for the next few years paying cash for everything, the higher interest rates will suck money out of your pockets.
Also, some types of debt can’t be discharged in bankruptcy.Here’s a list.
It is. And getting better rates requires dealing with a “catch-22”. See, I could possibly get a better rate than the 21.5% of the highest interest card. But I can’t because I have too high a credit utilization percentage. In a few months, I’ll have that card paid off and my utilization percentage will be low enough to probably get a loan…that I won’t benefit from because the loan’s interest rate is highly unlikely to be less than 10.5%.
Your first problem is that you have to get court approval to become bankrupt. Let’s assume that in your jurisdiction that is just automatic. But when you are declared bankrupt, the court sets the terms of your bankruptcy.
So let’s say that you have paid off on your house, worth $100K, and you owe $25K. OK, the court says: you’re bankrupt. Here’s our court-ordered payment plan: we sell your house, pay your debts, and you get anything that’s left over. The administrator sells your house at auction for 75K, you get $50K, and now you have to find somewhere to live.
Or perhaps here’s our plan: you’ve got a good job at 75K: you can afford to pay off at 25K per year, leaving you 50K to live on: you can apply for discharge from bankruptcy after one year if you have kept up the payments as per the bankruptcy court payment plan.
Bottom line: if you can afford the payments, bankruptcy will enforce the payments, not excuse them. Bankruptcy is only a useful option for people who can’t make the payments.
Of course, all your debts are cleared, at the bankruptcy. That doesn’t mean that you can get there without paying as much as you can.
There are organizations that will help you consolidate your debt, get a lower interest rate, and maybe even get some of the principal forgiven. I know there are nonprofits that do this for free or for a small fee; there are also some unscrupulous types who will charge a lot for “reducing” your indebtedness. (This is in the US.) I’m afraid I don’t know enough to point you to a good one, Googling “credit counseling” turns up a lot of them and I think you’ll have to do some research–but I imagine it will be time well spent.
My mantra about anything to do with loans is always “talk to your local credit union” even if you don’t (yet) have an account with one. They are much more consumer friendly than banks and more willing to loan at reasonable rates and with less collateral. You’d probably need to open an account to get a consolidation loan. But they might also point you to a local, reputable credit counseling org.
ETA, I don’t know how you got into this situation–if you had extraordinary expenses, like unexpected big medical bills, that can happen in a heartless country like the US. If it’s the result of “ordinary” spending–well, you need to come up with a more reasonable plan for how to live. No judgment, I’ve been in tight spots too in my life.
I’m assuming you live in the US. Let us know if you live somewhere else.
You should talk to a bankruptcy lawyer. You should be able to get a free consultation.
You will probably be surprised by what the lawyer tells you. The law isn’t obvious and straightforward. For example, my lawyer told me I couldn’t file for bankruptcy until I was behind on my credit card payments. So I had to stop paying them and wait. (This was years ago and the laws have changed, so I don’t know if that’s true any more.)
You can keep your primary residence and your car. You sign an agreement to continue making payments on them, if you owe on them.
For 7 years it will be very difficult to get a mortgage or a car loan. You will probably need someone with excellent credit to co-sign for you, which means they must make the payments if you don’t.
Some banks will find a way to stretch that 7 years out to 10 years. Some will do it with loopholes, some will “accidentally” forget that they were supposed to drop your bankruptcy from their records.
You can discharge the debt on some of your credit cards and keep some of them. DO keep at least one credit card that has no balance. DO NOT keep a credit card that has a large balance on it.
For a short time you won’t be able to get a decent credit card. This is why you want to keep one, for emergencies, and for things that require a credit card - like booking a flight or renting a car.
This will show on your credit history, so if you apply for a job they will know about it. Some employers care, some don’t.
There’s a lot of good information on the web, and I’m sure it’s more accurate than me, relying on old memories. But I can tell you this - bankruptcy was perfect for me. I was sick and unemployed, and I will always be grateful that I was able to declare bankruptcy.
It was good and bad for a friend of mine. It took the pressure off, but he had trouble when he needed to buy a car. He ran up more credit card debt because he didn’t change his bad habits. He did finally get it under control, but whenever the subject comes up he is very bitter about it.
Credit history is also looked at by landlords before signing a lease. So make sure you have some secure housing.
I have heard many many stories of people using the debt-snowball method to get out of more debt than you have, but it depends on your situation. If you are single in the Midwest, you should be able to pay off those debts with that salary in no time. If you have 3 kids and live in NYC, probably not.
Interesting post, I’d reiterate no. 1 if it’s a serious idea. It also varies by state even assuming the US.
No. 7 is where ‘moral’ and ‘economic’ meet or overlap. A lot of morality is arguably about a shared set of values among people. You can compartmentalize and put aside (at least for arguments sake) your own moral ideas about not repaying debt you’re able to pay. Gauging how other people’s moral judgment is going to affect you is trickier. They may not admit negative judgments they make. They may not even limit their negative judgement to cases where the person could have paid, though in OP case the analysis seems to be whether it makes sense just in $'s to default aside from ability to pay.
The cost in 7 might be quite high, or as you say it might not be. It’s much more difficult to assess I think than the more straight forward aspects like doing without a mortgage loan for X years, etc.
Bankruptcy is for when you are not able to cover the payments on your debt, not for when the debts are just inconvenient.
At your current debt/income ratio, I would say that you will probably lose far more than you gain. You will pay higher interest rates on future loans, as well as higher interest rates on current lines of credit if they are not fixed (and if they are fixed, then they will likely be un-fixed).
Often, if you work with a creditor, you can get them to drop interest and penalty fees, sometimes even principle, if you can pay a lump sum upfront.
My advice: good advice, either get your spending under control, and simply pay down your debt to sustainable levels, or, bad advice, run up your spending until you are in enough debt to make bankruptcy a more viable option.
At my small business a few years ago, a guy came in and for some reason his name/face rang a bell. The computer remembered that he’d bounced a check years before that, was sent to collections, then later declared bankruptcy.
I asked if to get the fuck out, citing his bad check/bankruptcy as the reason I wanted nothing to do with him. He was pretty pissed off, claiming that I couldn’t treat him like that, but I threw him out and told him I hoped he died in a fire.
Also consider all of the things other than loans (credit card, car, mortgage, etc.) that will use your post-bankruptcy in the toilet credit score. Here are some examples I can think of. Your insurance rates will probably go up. You may have to pay a deposit to get utilities, tv, and internet. Post paid mobile plans may require a deposit, though with the number of cheap pre-pay plans, that isn’t as big of a problem as it was 15 years ago Basically, any company that usually bills for service, may demand full payment upfront, or a big deposit. You might be stuck with bank accounts and credit cards that charge a fee. As mentioned, you may have more difficulty finding a place to rent, which in real terms translates to you will end up paying more to rent, or renting in an inconvenient location.
Many of the things that make it expensive to be poor will affect you, because your low credit score will make you seem poor to companies that check it.
I think there is a big difference between declaring bankruptcy over a $200k underwater mortgage when you’ve lost your job, and over $25k in credit card debt when you do have a job. If your car insurance goes up $400/year, that is nothing compared to the mortgage payments you can’t make, but will completely offset anything you save by getting the credit card debt rolled into a low interest bankruptcy payment plan.
Yeah, the first thing they’ll evaluate, at the free consult, is if you’re able to repay your debt. They don’t just let people go bankrupt because they apply. They may well point out there are avenues open for you to restructure your debt, and you are still earning, so it actually is quite doable, and you won’t be eligible for bankruptcy.
Best way to find out is to arrange the free consult, and go in with clear questions, (save them till the end though.)
