When Roderick Simmons, 35, a nurse in Jackson, Mississippi, found himself facing credit card debt and medical bills that added up to $72,000, he tried credit counseling, but it wasn't enough. He decided to file for bankruptcy. Within two years, his debt was under control and he found a credit card company willing to give him a credit card again. Today, five years later, Simmons says filing for bankruptcy gave him the fresh start he needed.
With the recession straining more budgets, a growing number of Americans are making the same decision. The American Bankruptcy Institute reports that consumer bankruptcy filings increased 41 percent in March compared to the previous year, bringing the total number for the month to 121,413. "More people are coming to bankruptcy because they've exhausted all their other options," says Carey Ebert, a Hurst, Texas-based bankruptcy attorney and president of the National Association of Consumer Bankruptcy Attorneys.
Filing isn't right for everyone, but consumer bankruptcy attorneys say that once debt becomes unmanageable, then it's time to consider it as an option, despite the fact that legal changes in 2005 made filing for bankruptcy more difficult—and more expensive. Here are 9 factors to consider before taking the plunge:
Take a close look at your budget. Before filing for bankruptcy, consumers are required to take a credit counseling class that helps them examine their expenses and income, says Claire Ann Resop, a bankruptcy attorney in Madison, Wisconsin, and board member at the American Bankruptcy Institute. The class gives people the chance to consider if there is a way to resolve their debt by making lifestyle changes or getting gifts from relatives.
Prioritize your payments. While you're struggling to manage multiple debts, be sure to prioritize house and car payments, which for most people are their most important assets. Many people make the mistake of paying their credit card bills first because credit card companies are so aggressive with their phone calls, says Ebert. "Credit cards should come after you've taken care of your obligations to put a roof over your head or have a vehicle to go to work," she says.
Exhaust your other options. Before filing for bankruptcy, most people try debt settlement programs, negotiating alternate payment plans with their creditors, and loan modifications. "But most of the people that we see filing either aren't able to participate in those options because they have no income, or their income isn't adequate to make payments," says Ebert.
Consider your credit score. Bankruptcy can be reported on your credit report for up to 10 years under federal law; bad credit typically stays with you for seven years, says Ebert. But that doesn't necessarily mean that you shouldn't file for bankruptcy. Many people who are close to considering bankruptcy already have troubled credit reports, Ebert adds.
If it's the right decision, don't wait. Once you consider the other options and realize bankruptcy is right for you, then there's no need to waste time second-guessing yourself. "In some ways, [filing for bankruptcy] is just calling it what it is. If you can't afford to pay it, there's no reason to keep digging a deeper hole," says Resop. Instead, she adds, "They should file for bankruptcy and get the fresh start that bankruptcy allows them."
Get professional help. Bankruptcy attorneys often offer free initial consultations and then arrange for future payments. It's not always expensive; some professionals offer their services at reduce rates or even for free. Simmons hired his lawyer for about $400.
Stay away from scams. Ads in newspapers or on the radio that promise to help people cut their debt in half for free tend to be scams, warns Ebert. "They don't get you out of debt, they make it worse," she says. Typically, she says, companies that offer a quick fix or promise they can enable consumers to cancel their debt require large upfront fees. "By the time you figure out what happened, your debt has escalated because you haven't been making payments, and what could have been manageable becomes unmanageable."