When bankruptcy is best

The fact that most people don't rush into bankruptcy -- many, if anything, wait too long to file -- doesn't answer the question of whether it's right in your particular circumstance. Because beyond the financial and legal aspects is the fact that you're reneging on debt that you promised to repay.

For some, that reality outweighs any benefit that they might receive from filing. Author Mary Hunt, who dug herself out of more than $100,000 in unsecured debt over 13 years, said she's glad she didn't even consider filing when she hit her financial bottom in the early 1980s. Hunt feels it would have been wrong to bail on her creditors and believes the long, often arduous task of repaying them helped her cure the overspending that got her into financial trouble in the first place.

"I really believe that had I not made that difficult U-turn on the road to total financial ruin -- and the subsequent journey back to solvency, I would have never made the personal life changes necessary," said Hunt, who runs the DebtProofLiving Web site. "Bankruptcy would have been too easy. And knowing myself, I would have been the perfect candidate for a repeat performance."

Making a decision

Others, often with less debt, have come to different conclusions. Sometimes their bills have spiraled so high it would take a lifetime to repay, as is often the case with medical debt when someone who is uninsured gets hit with a serious accident or long illness. Or they see bankruptcy as a purely business decision: the lender made a business choice to extend them credit, after all, with all the risk that entails.

Personally, I have a hard time with people who feel no ethical qualms about filing for bankruptcy. The decision shouldn't be that easy.

Most people in financial crisis have at least some responsibility for their situations. Carrying credit card or other high-rate debt and failing to have a rainy-day fund are two of the common ways people set themselves up for financial failure. Then when life's inevitable setbacks come along -- job loss, divorce, accident, illness -- they're quickly pushed over the edge.

You may not have been entirely responsible for the evils that befell you, but taking responsibility for your part is not only the right thing to do -- it may help you stay out of trouble in the future.

If you use bankruptcy as an easy out and don't fix the problem that led to your debt, you're likely to get right back in the hole. This is especially true if your financial crisis is due to compulsive spending or an untreated addiction -- to drugs, alcohol, gambling, whatever.

Be realistic about your dilemma

If, on the other hand, you're putting off filing solely because of ethical objections, I'd ask you to be realistic about your situation and what it will take to rectify it. The United States outlawed debtor's prisons more than a century ago, and to me it makes little sense to struggle for a lifetime with impossible debt.

In my view:

If, despite your best efforts, it would take more than five years to pay off your credit cards and medical bills, or you would need to use assets that would otherwise be protected in bankruptcy -- like retirement accounts and home equity -- then you should at least consult with a bankruptcy attorney about your options.

I choose the five-year period for a reason: That's as long as a bankruptcy court would require you to stick with a repayment plan under Chapter 13. If you're not sure how long it would take you to pay back what you owe without bankruptcy, consider a consultation with a legitimate credit counselor, one affiliated with the NFCC.

The credit counselor can help determine if your budget just needs an overhaul, if you'd benefit from a debt management plan with your creditors (see "The consumer's guide to credit counseling") or if your finances are beyond the counselor's help.

Ultimately, of course, the decision whether or not to file is in your hands. Whatever any one else says, you're the one who will live with the consequences.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated Dec. 3, 2008

< previous |  1 | 2 |