Here Are Some Signs That Bankruptcy Is Your Best Option

Most people don’t set out to go bankrupt, but a fresh start offered by the maneuver could be a wise and necessary move to recover from such setbacks as poor financial choices made when you were young, medical disasters or a divorce.

Super Frugalette identifies three indicators that may mean bankruptcy makes sense for you:

* Time won’t heal your financial wounds. If you’re not making enough to cover your expenses and your debt payments, you’ll only sink deeper and deeper as time passes.

* You’re considering sacrificing your retirement account. If you need the money to survive rather than as a quick fix, you may want to reconsider. Typically, 401(k) accounts are protected in a bankruptcy.

* You need to keep adding debt just to feed and clothe yourself. If you’re so cash-poor that you need to resort to nearly maxed-out credit cards for the basics, you’re wobbling on your last financial legs.

Bankruptcy isn’t a decision that should be taken lightly, and one that will have a lasting effect on your credit. But even the proud and determined shouldn’t ignore the relief that bankruptcy can offer.

Should you make peace with bankruptcy? Four points to consider… [Super Frugalette]

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  1. Wonderweasel says:

    Bankruptcy is so irresponsible. Man up, get a couple dozen credit cards. buy a yacht on credit, then fake your own death and sail that bitch to Fiji.

    Its the American way.

    • jvanbrecht says:

      While I realize that you are making a joke..

      The reality of Maritime law is that if a boat is reported stolen, unless you plan on heading out to join the pirates in Somalia, you will not be able to make port when the creditors come a calling for the yacht to cover the debt and then report it as stolen :P

      Also.. you cannot buy a yacht on credit.. unless you have a 300k+ limit card..

      • Wonderweasel says:

        Wow.

        Pardon me, captain serious.

      • huadpe says:

        Can the creditors report it stolen though? As I understand it, you’d own the yacht, subject to a lien, and the creditors would need to go through probate (after you faked your death), to make a claim against the yacht. Then they could repo the yacht, but I still don’t think that makes your (corpse-like) possession theft.

      • Bsamm09 says:

        Where can you get a yacht for $300k?? A nice Yellowfin center console can set you back that much and, while bad-ass, would never be mistaken for a yacht.

      • megafly says:

        But, If the jacht was lost at sea, the insurance would pay of the creditors.

  2. Bsamm09 says:

    “* You need to keep adding debt just to feed and clothe yourself. If you’re so cash-poor that you need to resort to nearly maxed-out credit cards for the basics, you’re wobbling on your last financial legs.”

    Aren’t debts incurred in the last 2 years not discharged? If you are maxing out credit cards to feed yourself, I would think that your debt would be recent. Or you have had a lot and it has just finally come to this point.

    • Bluto says:

      Not quite. Recent, large purchases (a television, etc.) could be excluded by the bankruptcy trustee, but not everything.

      You can’t have fun and run your cards up to the limits then get away free, but no trustee is going to chase you down for your grocery bill.

    • adamstew says:

      As someone who has been through the process myself a few years ago for medical bills, this isn’t true. The only debts that aren’t discharged are:

      1) Student loans
      2) Priority debts (Your lawyer for any BK proceedings and IRS debt under a certain age)
      3) Any secured loans for property you wish to keep (auto and home loans)
      4) Any debts taken out with the intention of repaying them.

      To elaborate on #4:

      The standard in US BK law is that any debts that are 6 months or older are presumed to be dischargeable and the burden of proof lies with the creditor to prove that you had no intention of repaying the loan. This is extremely difficult to prove and i’ve never heard of it being done without an admission of some kind from the debtor.

      If the debt is less than 6 months old, then the debt is presumed non-dischargeable and the burden of proof lies with the debtor to prove you had the intention of repaying the loan. This is typically pretty easy as all it takes is evidence that you’ve made payments on the loan since taking out the loan. However, most attorney’s will just advise waiting until 6 months have passed before filing your BK petition.

      • Yo Howdy says:

        Many priority debts are still discharged (domestic support obligations, student loans, and income taxes less than 3 yrs old being the obvious exceptions). They are all just first in line to collect in the event the trustee collects assets.

        • finbar says:

          You sure? I thought the only way to get out of student loans is die before they are paid off.

          • CoachTabe says:

            You misread what he wrote – he said student loans are an exception and, thus, not discharged.

            • finbar says:

              My bad.

              • kujospam says:

                Student loans can be discharged, you just have to prove hardship, which is severe form of BK. Not impossible, but difficult to do. You usually have to have kids, a disablity, or some major life changing event that will last you atleast 10 years from the people I have talked to.

    • Costner says:

      I have a family member who planned to file bankruptcy. He maxed out his cards and used them for everything possible. He stocked up on grocery items and loaded his pantry. He bought new clothes. He charged anything and everything he could think of that wasn’t blatant (so no $3000 charges to Best Buy for a new Plasma etc).

      Then he called up his Insurance agent and pre-paid a full year of auto insurance (the most the agent would allow). He even charged some magazine subscriptions and bought gift cards to have on hand. All things considered he ended up writing over $75,000 of debt off… the bulk of which included two credt cards and a line of credit which totaled somewhere north of $45,000 of that debt.

      When it came to file bankruptcy nobody even blinked. They asked for his last statements for each card – but since he was nearly maxed out for over a month the last statements showed very few charges and those were typical gas or grocery type items. The end result was a full discharge of all of the debts and he walked away totally free and clear.

      Oh – did I mention he filed bankruptcy about 10 years earlier too? Did I mention he will be filing again in about four years when he is eligible? Rinse and repeat.

      Yea… classy guy.

    • Awesome McAwesomeness says:

      They are if there aren’t any flagrantly luxurious purchases, and that is only in the past 6 months. Even then, you may can still do it if you have a particularly good attorney who is in tight with the bankruptcy trustee. It depends on a lot of things. The quality and reputation of your attorney count for a lot in how much your are scrutinized.

      The general rule is no luxury purchases in the past 6 months. If you charge groceries, meds, and general bills, you are okay.

  3. agent 47 says:

    How do you fire a bullet with it’s shell intact? That’s a neat trick.

  4. john says:

    If you are so cash-poor that you can’t even feed yourself without credit cards, you are far worse off than even bankruptcy can help. At that point, you need help from anywhere you can get it. You probably can’t even afford to file and pay the attorney for bankruptcy.

    • Loias supports harsher punishments against corporations says:

      That depends. If you’re making 20k/year and all that is going to credit cards – a bankruptcy lawyer knows that once the CC payments go away, you have cash to pay the lawyer.

      Sometimes I think a bankruptcy lawyer is more religious than a priest – a lot of faith there.

  5. FatLynn says:

    If you do go that route, find a legitimate lawyer or debt counselor, not some franchise Mcbankruptcy lawyer.

  6. Dallas_shopper says:

    I know some very responsible and ethical people who had to file for bankruptcy due to circumstances beyond their control or a lying, manipulative, soon-to-be-ex spouse. And sadly, it is usually women doing the financial damage and the men dealing with the consequences in the cases I’ve seen…though I know from personal experience it can also work the other way.

    • FatLynn says:

      So why even mention the genders?

    • VintageLydia says:

      Why even bring gender into this, then? Both sides can be royal dicks in a messy breakup/divorce.

      • Dallas_shopper says:

        That is correct, but I brought gender into it because, at least from what I have observed in my own experiences so far, men and women usually file for BK for different reasons/under different circumstances. That’s all.

    • DariusC says:

      To reply, the gap between mens income and womens income on average is pretty large. A woman who stays at home to take care of the kids for years has that much less experience in the workforce and usually will claim alimony far quicker than men. This is, of course, the old traditional model of work/parenthood. The point he made is that women will clean a man out far quicker and easier than a man could clean a woman out. Same goes for custody of children. Much harder for a man to get custody than a woman.

      • Dallas_shopper says:

        Sometimes, though in my last 2 relationships I made significantly more than my boyfriends. My ex-husband and I made about the same amount. In the bankruptcy cases I’m thinking of, income was roughly equal. Also, there’s a difference between sacrificing to raise the kids/put husband through law/med school and running up a $100k debt, hiding it, then sticking the husband with it in the divorce.

        • consumeristjohnny says:

          Nothing can be “hidden” unless you are too blind to seen. Both ends of a divorce are trying to get the best for themselves. There are men who “hide” assets in others names, or try to lower reported income to lower their child support or alimony payments. Your comment is really a stereotype and would be the same as saying most black people have bad credit.

          • Slaughterhouse5 says:

            Wrong. There are well documented cases of spouses having separate accounts and hiding either assets or debts from their spouses. Her comment was not a stereotype, nor was it a generalizations. The comment indicated that in her experience she has found those in her acquaintence who have victimized have more often been men. She clearly indicated that she accepts that it happens both ways, but that in her experience it has been slanted in one direction. In the experience of another the slant may be different.

      • katarzyna says:

        You’re assuming that the money earned during the marriage is “his” money and not “their” money. That sort of flawed thinking seems to be rather common.

    • Loias supports harsher punishments against corporations says:

      I sense you are a male who knows one female who did this.

      But that is not indicative of an entire gender.

      • Dallas_shopper says:

        Sorry, you are incorrect. I’m a female and as I said before, most of the people I know who have filed for bankruptcy have been men, and most of those cases were due to a soon-to-be-ex-wife’s irresponsible and/or vengeful spending.

        Just sharing my own experiences, sorry if they don’t validate your assumptions.

    • iamjustjules says:

      my current partner has no idea about budgets or savings or anything. I’ve tried a hundred times to help her with budgeting, emergency funds, and retirement accounts, but she calls it “boring” and just sees me as an ATM.

      Saddest part is that she makes slightly more than me, but lives paycheck to paycheck and asks me for money when her employer doesn’t give her a check on time (never got direct deposit setup). She calls me controlling and mean, while I tell her I’m responsible and trying to help her learn what to do so I don’t have to be her parent

      • Dallas_shopper says:

        You know this is only going to get worse, right?

      • Duke_Newcombe-Making children and adults as fat as pigs says:

        Run. Run hard. Run fast. Run far.

        /more unsolicited advice from a random guy on the internetz

      • HogwartsProfessor says:

        Oh my Lord.

        You really need to rethink this. This is a HUGE red flag. If she can’t get her financial shit together, you’re going to pay the price. I don’t say this because she has trouble with finances–lots of people do, but they’re trying, and people like me who have problems with numbers can even try to be responsible. I’m saying it because of her attitude. You are NOT her ATM.

        If you marry this girl, she will likely not pull her weight. I’ve seen this happen before. It’s not fun. You guys need to have a serious talk about money.

  7. Cat says:

    * You need to keep adding debt just to feed and clothe yourself.

    Going into debt for clothes really can only happen if you’re a slave to fashion. There’s so many places you can get free or inexpensive clothes (Goodwill, etc). It’s not like you “need” to buy new clothes every few weeks. $5 for a pair of used Levi’s, and they’ll last how many years?

  8. lovemypets00 - You'll need to forgive me, my social filter has cracked. says:

    I have mixed feelings about bankruptcy. I know people get in way over their heads, through no fault of their own, like from catastrophic medical bills, and it’s good there is a tool for them to make a clean start. On the other hand, I see my husband’s relatives.

    They had the McMansion, massive credit card debt, 4 wheeler, Prius, new clothes, new furniture, flat screen TV (back when they first came out and were very expensive), even a cigar humidor! The husband played video games for more hours than most people work per week.

    Fast forward to Chapter 7 bankruptcy. They still have a lot of the toys, clothes, and furniture (and the 4 wheeler), somehow hidden from the court, and they’re driving a late model 4WD SUV. They walked away from a ton of debt that they could have repaid had they just cut back on their spending, sold some stuff, and actually worked instead of playing games.

    I think maybe a little detective work on the court’s part could have gone a long way in their case, as this is clearly not fair to people who have to legitimately file for bankruptcy.

    • HippieLawChick says:

      The court doesn’t do “detective work” in bankruptcy cases. That is the job of the creditors or the trustee. Bankruptcy is a legal proceeding, and if you can show that someone lied in those documents, you can have the discharge revoked. Most of the cases I have seen aren’t people with fancy cars and “toys” but regular people with job losses, catastrophic medical debt, etc.

      Pointing out the 1 in 10,000 case isn’t really a legitimate point for discussion, and sounds like political rhetoric to me.

      • huadpe says:

        There are alot of people who try and game the bankruptcy courts. The US Trustee is pretty good about finding them, but they’re way more than 1 in 10,000. Generally the ones who are doing the most cheating are least likely to come through a legitimate law firm to do their filing, since they’re often con artists who know perfectly well the bankruptcy laws, and are just trying to steal stuff by whatever means they can.

        See: people like this http://www.popehat.com/2011/09/25/anatomy-of-a-scam-chapter-index/

      • Slaughterhouse5 says:

        I beg to differ. When the bankruptcy laws were tightened a few years ago, their were people lined up for blocks – literally – in NYC to file before the deadline. While I am a fairly frugal person, much more often than not those who I know have filed for bankruptcy have lived and continue to live a more extravagant lifestyle than myself.

    • u1itn0w2day says:

      I know people like that who have had a LIFETIME of poor financial habits including OVER spending never looking at a price tag. They are currently unemployed and one step ahead of debt collectors and lawyers. And they still refuse to use generics or shop at a dollar store. And if they do have money in their pocket it’s going for optional luxary items-not survival stuff or old debt but leisure items & activities.

      Those who really need bk especially if they had one sudden catastrophic financial event are the ones that should be using bankruptcy and not those looking for a get out of jail free card for a lifetime of bad habits.

  9. impatientgirl says:

    Yes please declare bankruptcy and don’t be a responsible adult and live up to your responsibilites, nope keep that 401k!! Let everyone else foot your bill!

    • VintageLydia says:

      The vast majority of bankruptcy in this country is due to medical bills, but keep living in your fantasy where no outside circumstances can contribute to someone’s financial ruin. It’s not like illnesses wait until you can foot the bill before they manifest.

      • Costner says:

        The whole medical bankruptcy excuse is a bit overstated. Yes people will make that claim, but I’ve seen studies on the subject and in many cases it boils down to people living beyond their means and racking up credit card debt… then all of the sudden they need to have their appendix out and they lack insurance. So they can’t afford the $10k bill so next thing you know they file bankruptcy… which wipes out the $40k in credit card debt along with it.

        On paper guess what the reason for the bankruptcy is? You guessed it…. medical.

        The fact is, someone can have $50k worth of credit card debt and another $50k in unsecured debt from lines of credit etc, but if they spend a few grand on medical expenses or have to charge some prescriptions… that is the reason specified for the bankruptcy.

        Does legitimate medical bankruptcy occur? You bet – but it isn’t nearly as often as statistics claim at face value. I have a living example in my own family. He has filed bankruptcy twice and both times claimed medical bills as the reason, but both times medical expenses were not nearly as big of a part of it as was his spending on things like clothes, cars, guns, motorcycles, tools, etc, etc.

        This is a guy who owned seven motorcycles and three cars and had a gun collection of 10-15 firearms. He figured he probably would catch heat for owning all of the vehicles so he sold them all for cash, and when it came time to disclose property he claimed he only had a few guns and listed their values at far, far below true market price. He did the same with his remaining motorcycles – he claimed they were worth a few hundred each whereas in reality they were worth thousands.

        People game the system all the time. I work in the financial services industry and I can tell you from experience that legitimate bankruptcies are not the norm. For ever dollar of legitimate debt such as medical debt being written off, I see three to four of “other” debt. It really makes you shake your head at what the system allows because people abuse it all the time.

        • consumeristjohnny says:

          The reason for bankruptcy DOES NOT MATTER. If a company can file for whatever reason they want ( American Airlines, KMart, United, Delta, General Motors) a person can as well. I guess all these filings were a result of living beyond their means. If the creditor wants to track down the assets they are free to do so. If they are too lazy to do so, then tough shit for them. The trustee is not in charge of finding the assets or the money. That is incumbent on the creditor. If you know anything at all, there is a phase called the meeting of the creditors in a BK. They are free to object at that time.

        • Awesome McAwesomeness says:

          Try racking up $50,000 in medical bills with insurance. It happens every day. It’s not just the uninsured. People with emergency funds and insurance have crisis’s all of the time (like cancer) and rack up bills beyond their ability to pay.

    • MrEvil says:

      Tell that to companies that file bankruptcy periodically and have their debts vanish like a fart in the goddamn wind. They need to do the adult thing and pay what they owe don’t they?

  10. chizu says:

    There’s someone I know that I wish he’d actually file for bankruptcy. However, at the same time, I’m not sure if filing for one would actually resolve his issues in life, but I have a feeling it’d really help.

    He bought a house when he was young, and the mortgage was killing him. He also racked up a bunch of credit card debts (he paid one off recently) during his depression and just trying to get by. Either way, his bills were killing him and he’s a pretty depressed individual. I personally feel that if he actually could get rid of his debt (or the house — but the market sucks and it’s not selling at all), I think he’d actually have the time to himself and do things he wants to do. The thing is, he works a lot in order to pay for his bills, so he’s not being irresponsible. But because he’s always working, he doesn’t have the time for his friends or himself. It’s damaging to his relationships with everyone he knows, and it’s damaging him emotionally and mentally. We talked about how all his friends would not think of him any less if he were to walk away from his house, but he felt like we were looking down on him because we didn’t think he could do it. At times like this, I think it takes a lot of courage and it’s a very adult thing to recognise the losses he has, associating with his debts, and just walk away and start a new life.

  11. Swins says:

    That picture makes no sense at all.
    1. That is a complete .22 LR cartridge.
    2. When you shoot only the BULLET comes out, not the casing it never makes it to the target looking like that.
    Dumb!

    • HalOfBorg says:

      Most people would not recognize the lump of lead that the more correct version of this picture would show – assuming the bullet didn’t go through the card (or whatever is behind it). In this way it’s easy to identify and understand that these steps help make you ‘bullet-proof’.

      I guess.

  12. u1itn0w2day says:

    Once you are in a predictament that has you thinking bankruptcy you either go at it full steam ahead or find a way to settle your debts. I know people that could’ve been 2 years out of bk at this point and they haven’t committed to pay their debts or bk yet. In the meantime lawyers, debt collectors and process servers are in hot pursuit.

    I know people that should’ve been in bankruptcy years ago and they are like hanging on for a miracle. To compound a lifetime of poor financial management they layed off several years ago. They are hanging for the big salary captain of industry job without a 4 year degree.

    Point being for some bankruptcy will be their only way out. And bankruptcy isn’t the get out of jail free card it was less than a decade ago. The 2005 bk changes along with the 2008 crash have led to major changes in bk law. This isn’t your grandmother’s bankruptcy.

    • ChuckECheese says:

      The major changes in the law are mostly about increased paperwork/disclosure requirements, lame “debt counseling,” and timelines for debt to become dischargeable, It’s not all that different when it comes down to it. I have helped people file their own BKs. An important thing to note is that you can file almost for free if your income is low enough, but only if you do the paperwork yourself, and/or you do not pay anybody to help you (and they ask).

  13. CosmosHuman says:

    I have been holding my tongue on this one as I filed a BK7 in 2005. It was due to medical debt (over 300k) while incurred trying to save my daughters life that my insurance company refused to cover (mental health illness). I lost everything: my home and my confidence, mainly my self esteem. My daughter was eventually taken by the government and put into a group home for mentally ill teens and returned to me damaged at age 18. I even had to pay for child support as well. They refused to go after the sperm donor. She will never have a normal life and neither will I.

    I still am recovering and facing this again being jobless now.

    I have no money right now, just what is in my 403b. I was turned down for food stamps. I went to a food bank last week and had food for three days. It is all gone. UI has not arrived. I’m out of my meds and have no health insurance. I am really hurting now.

    • HogwartsProfessor says:

      I’m sorry things are so bad. I would help if I could. :(

      Sucking in our belts and cutting corners everywhere we can is becoming the new normal. It sucks. It sucks BAD.

  14. Matthew PK says:

    This only works if your debt burdens are government student debt…

  15. Matthew PK says:

    This only works if your debt burdens aren’t government student debt…

  16. HogwartsProfessor says:

    I’ve thought about this, to get rid of some medical debt I’m having a hard time paying. But I don’t think I’m in debt enough, except for student loans. I could pay THOSE if I didn’t have a stupid mortage on a stupid house that can’t hold its water. :P I’ve thought many times of just walking away from the fucker. I don’t think I’ll do it, though, unless I lose my job for some reason. So far I’m still hanging on.

  17. Rick Sphinx says:

    I did chapter 7, by no fault of our own. Yes, we bought a house, did not over buy. We did rack up credit card debt. We had every intension of paying it off. When the recession hit, our CC/Banks decided to play games. 1-They claimed to have sent a notice that said “keep current rate, and close account to pay off”, never received letter. So our rate went from 2%, to 40%! They would not back down, we had no choice. So instead of the bank getting money over the next few years, they got nothing.
    I had to make a choice, loose it all, or go bankrupt. We saved our home, and never missed a payment, even with unemployment for 20 months. I chose to pay our mortgage, and nothing else. I don’t feel bad about it, the banks made me do it. They would have got paid if they worked with me, and didn’t raise my rate to a percentage that was just not achievable. Think about it. Spend 5-10 years paying it off, struggling, ruining my credit. Or go bankrupt, owe nothing, spend next 5-10 years re-building credit. 2 years after, we purchased a used car, and got 2.9% rate, go figure. I was told that since we were not behind, and pre-acted, my credit was not lowered nearly as much, if I had been late etc, and not paid them for months, then declared bankruptcy. I was also told to thank my lawyer to doing a good job.
    And no, they can not touch your 401K. If you’ve got student loans, I’m pretty sure you can not get out of these with this route. But better to save your 401K if that is what you are thinking of using. Find a good lawyer who specializes in bankruptcy, it’s important. There is no shame in this, things sometimes happen, don’t live with that tremendous weight on your shoulders, if you are, at least get a free consultation to explore if this option is right for you.
    Lots of people think bankruptcy means they take everything. they don’t, you have rights, and can often keep you home, car (if paid for), etc, the banks do not want the household stuff like TV’s, furniture etc.

  18. Broke_Daddy says:

    Bankruptcy was an option after my wife had her third spinal operation. Her disability had been cut off and we had a really tough time. Five digit debt plus a truck and a boat. I researched different credit counseling outfits and settled on one. Now, a few years later we have two months to go and we’re done. We didn’t ask for or get any breaks on the debt. We’ve paid every cent back. Credit rating has gone back up to fair, own our house and our vehicles outright. It’s been tough watching every nickel, but it’s been worth it.