Is bankruptcy ever a good idea?
There are many people who would claim that declaring bankruptcy is never a good idea. Just saying the word “bankruptcy” leaves a bad taste in your mouth.
But, good or bad, today’s modern economy has made bankruptcy a very real necessity for people in order to improve their lives and financial situations. The question, really, isn’t “When is bankruptcy a good idea?” but more, “When is bankruptcy a good idea for you?”
Using Bankruptcy to Eliminate Debt
Far and away, the number one reason people declare bankruptcy is to clear away excessive debt.
Whether it’s hospital bills, getting upside-down in a car loan, maxing out your credit cards, or taking a few too many personal loans from a payday lender or financial institution, everybody acquires debt. It’s very important to remember that we all make mistakes and get in over our heads sometimes, and bankruptcy is simply a tool to help people get back on top.
What is most important, however, is finding out whether or not bankruptcy is the right tool for your situation.
Ask yourself, “Can I really pay my debts? Or am I well and truly buried?” If your income is high enough, you won’t even be eligible for Chapter 7 bankruptcy and will have to file for Chapter 13 restructuring of debt. If you have the income to cover a Chapter 13 restructuring, then the question really becomes “Do I have the willpower to pay these debts off traditionally? Or do I need the assistance of a structured payment plan?”
There’s no shame in filing for Chapter 13 – it can be a very valuable tool in teaching you how to budget and manage your money better – but you’ll still have to deal with having a bankruptcy on your credit report.
Speaking of credit reports…
Using Bankruptcy to Fix Your Credit
As we’ve covered previously, bankruptcy will have a negative short-term effect on your credit. There’s no way of getting around it, and the higher your credit score already is, the more of a hit you’re going to take when you declare bankruptcy.
However, if your credit score is on the low end, bankruptcy can actually be quite beneficial to you by clearing away some debt and improving your DTI, or Debt-To-Income ratio. Additionally, by the time the bankruptcy falls off of your credit record, the rest of your bad debts will also have fallen off, and your credit score will see an impressive gain.
Just remember to be responsible with your spending after declaring bankruptcy, and you’ll see incredible improvements before you know it.
So When is Bankruptcy a Good Idea?
When it’s the best idea for you.