Making the decision to file for bankruptcy can bring out very mixed emotions. On one hand you probably feel a great sense of relief that you are taking affirmative steps to end the stress and struggle of fighting an unwinnable battle. On the other hand, you may feel guilt, disappointment and even a little dishonest because you are using the legal system to avoid paying debts you have incurred.
Elsewhere on this website I have written about the moral issue associated with bankruptcy – is it morally wrong to file for bankruptcy? My conclusion is that if you need to weigh the moral imperative of paying a credit card company that is charging 29% interest on your balance vs. putting that money to work in a 401(k) or an IRA to save for your retirement, the investment in yourself and your family is the superior moral choice.
Ultimately I see bankruptcy as an economic tool driven by economic realities. I ran across a very insightful article on a website published by Bond and Botes, a well respected personal bankruptcy law firm in Birmingham, Alabama called “Signs that Bankruptcy Might be the Right Choice for You.”
Some of the questions to ask include:
- are you paying the minimum amounts (or less) required for your debt repayments? This suggests that you are living paycheck to paycheck and most likely paying more interest than principal on your loans
- are you approaching the credit limits of your credit cards? This suggests that your household budget is in the red and that you are spending more than you are earning and need to take action.
- are you using credit card to buy groceries or gasoline because you do not have the cash? This, too suggests that your household budget is in the red and that you are on an unsustainable path.
- are you regularly late with your mortgage, rent or car payments. Presumably housing and transportation are essentials for you and your family – if you are not able to pay these expenses on time your budget is not in balance.
- do you have less than $500 available for an emergency – this suggests that you would not be able to survive an unexpected illness or even a day or two of lost income
- have you or are you considering borrowing against or cashing out your 401(k) or IRA to pay debt – this is almost always a terrible idea as retirement money usually can be protected in bankruptcy. Leveraging your long term future to pay current debt is a very bad sign
If you recognize yourself in some of these scenarios, it is probably time to talk to a bankruptcy lawyer to discuss whether Chapter 7 or Chapter 13 is an option. You should not wait until a repo driver is circling your block or until you have received a foreclosure notice. While a bankruptcy can be filed in a matter of hours in an emergency situation, you are much better off speaking with a bankruptcy lawyer well before you find yourself in a crisis situation.
