Should we declare bankruptcy?

July 1, 2007 2:55 PM

Should we declare bankruptcy?

My wife and I have been married for almost 1 year. We are currently $76,000 in debt, and it is the cause of all of our stress. We are also both going to be having surgery within the next couple of months, and despite having insurance through my work, we expect to take on another $4,000 - 6,000 in debt. In addition, my wife just lost her job on Friday, and with the upcoming surgery it is looking like it will be until August before she can find another job. Our debt breaks down like this:

$12,300 - Credit Cards
$21,000 - Student Loans
$9,500 - Auto Loan
$33,800 - Unsecured Personal Loans

The total monthly payments for all of this comes out to $1,700. Our basic living expenses (rent, insurance, utility bills) equal out to $875 a month. That means we are paying out $2,575 a month, and my income is only $2,200 a month (after taxes). That puts us at -$375 per month, and we haven't even included groceries and gas yet!

At this point we have not paid any bills late as my wife has just lost her job, but by the end of July we will definitely have to start paying things late, or maybe some things not at all. We could borrow a small amount of money from some of our relatives to help us out if things get really tight, but that will only get us by short term.

I'm sure if my wife gets a decent full-time job ASAP after her surgery we could get back on track and maybe even start paying above the minimum to get us out of debt quicker. The unsecured personal loans were all used to pay off previous credit cards, so we have made some attempts to improve things, and I'd say overall we are better off now than we were last year, but it's beginning to look hopeless to us, and we think we'll never be out of debt. I've posted this anonymously, so I'm not really looking for the moral lecture. If we do declare bankruptcy, we would use this as the fresh start that it was intended, and not make the same mistakes that got us to this point. Our primary concern is that we have a 2 year old, and we want the best life possible for her. It would seem that if we declare bankruptcy we could get back on track much quicker and relatively quickly purchase a decent family car (instead of the truck we have now) and even be on the path to home ownership.

The other thing is we're not even sure if we qualify for bankruptcy at this point. As I said, we haven't paid anything late, but we will be very shortly. We'd rather skip the whole debt collector process if possible and just go straight to bankruptcy.

posted by anonymous to work & money (31 comments total)

Read this. Especially the part about the "means test". Because while I can't give you a professional opinion, I believe that your circumstances are such that you will not be able to discharge your student debt, that you will lose your car, and you may not even qualify (given your combined income level) for a discharge of your unsecured debt.
posted by SeizeTheDay at 3:09 PM on July 1, 2007

The unfortunate thing is that usually, student loans are NOT discharged in bankruptcy - yes, you can't get out from under them even through bankruptcy.

So.

If you think you can handle your debt, the proper procedure would be to concentrate on paying the high-interest stuff first, and let the low-interest stuff (like student loans) languish, trying to get a deferral or just stop paying on them.

If you DON'T think you can handle your debt, the proper procedure would be to keep paying the non-dischargeable student loans while trying to get out of the rest via bankruptcy.

What I would suggest as a first step is that you call all your various creditors, explain the situation ("wife lost her job, can't afford to pay you"), and ask for reductions in the interest rate and/or deferrals. You will probably find that, rather than have you stop paying them at all, they are happy to work out some deal where you pay less. Once you've badgered all your creditors extensively, reevaluate the situation. Now can you afford to pay? If not, stop paying on the ones that didn't cut you a deal (or perhaps even the ones that did cut you a deal), and go consult a bankruptcy lawyer.

You can also probably sell the car, to get rid of that loan.
posted by jellicle at 3:11 PM on July 1, 2007 [1 favorite]

Please call a local attorney with experience in Chapter 7's and Chapter 13's (which may be a more likely outcome for your currently-non-disaster situation); he or she will know what portions of your debt can and can't be discharged, whether you meet the new Chapter 7 means tests, etc.

Given their usual clientele, personal bankruptcy attorneys will understand that you can't pay a lot for your consultation. But by the same token, they will probably require cash up front.
posted by rkent at 3:12 PM on July 1, 2007

Oh this sounds so familiar. When my husband and I met I was near $60K in the hole, and about to declare. Then my dad, who is an accountant, gave me the following advice:

Do whatever you can to avoid declaring bankruptcy.

It will follow you around for much longer than the 7 years everyone claims, and will haunt you worse than the debt you carry now.

Based on his advice, i signed up with a consumer credit counseling service (I used Genus (now AFS). They contacted each of my debtors, got the fees and interest levels dropped to nothing or nearly nothing, so that everything I was sending actually made a dent, as opposed to those minimums that actually leave you in worse debt than the month before.

They worked with me to come up with an amount of money I could send every month. I would send it to them and they would send it to the creditors. Over the next three-to-four years, my then-fiance, now husband, and I paid off everything.

In the meanwhile, we learned how to live off cash as much as possible. We still have a credit card for emergencies and short months, but we have it capped at a VERY low level so that it can't go over a certain amount.

I can't say that we don't still have a hard time managing money, but we are never in that situation. Ever.

FWIW, we now own our own home, and our credit scores (as of a few days ago, when we both easily qualified for a home equity loan to do work on our house) was up from the 500s (or less) for each of us about seven or eight years ago to over 800 for both of us.

Call one of these companies - they are not-for-profits and will even waive their fee if you request it.

And no - I don't work for them.

But hang in there - I have SO been where you are - crying on a street corner with no cash and no room on my 20 credit cards - and it CAN get better!!
posted by OhPuhLeez at 3:14 PM on July 1, 2007 [2 favorites]

Oh yeah, and some more detail on the means test: it's basically a decaying average of both spouses' incomes for the past 6 months, so your wife's job will still count against you in the calculations, at least for a few months.
posted by rkent at 3:15 PM on July 1, 2007

Oh - forgot to include above - your credit report will show as "In credit counseling" for the credit cards and loans that you are paying off with them. But as soon as you are finished paying these off, you can have letters sent to each of those companies to show the accounts closed, and then the accounts will just show as "Closed - paid in full" with no mention of the credit counseling - which is a huge benefit of going the getting help route as opposed to bankruptcy.
posted by OhPuhLeez at 3:16 PM on July 1, 2007

Apply for economic hardship on the student loans.
posted by corpse at 3:27 PM on July 1, 2007

Go to the consumer credit counseling, but really, stop paying the student loans entirely. They can't re-possess your education.
posted by Cool Papa Bell at 3:37 PM on July 1, 2007

cpb, what happens when they stop paying student loans? Im sure its no good for their credit. They can always get a long deferal for student loans. The student loan people always want to play ball with your circumstances.
posted by damn dirty ape at 3:43 PM on July 1, 2007

This:

stop paying the student loans entirely

is terrible advice.

They can't re-possess your education.

No, but they can screw your credit rating pretty seriously. Never just ignore debt. Take the long view.
posted by mkultra at 3:45 PM on July 1, 2007 [1 favorite]

Credit scores are both more difficult to damage and easier to repair than most people think. They are not fragile crystals where once flawed, they are worthless. Witness the anecdote above. When acquiring future financing (such as when you're ready to buy a house), there is always an opportunity to negotiate with a lender, even with a low credit score, and the nature of the loan is taken into consideration. Defaulting or renegotiating on a student loan is rarely considered an out-and-out tragedy, despite what most student loan officers will tell you. Go to credit counseling, but prioritize the student loans dead last.
posted by Cool Papa Bell at 3:51 PM on July 1, 2007

I think you're the poster couple for credit counseling. Also, would it be at all feasible for you to get a second job? It may be less than ideal, but it might be a lot better to do that for a couple months than going bankrupt.
posted by SuperNova at 3:52 PM on July 1, 2007

Do not, I repeat, DO NOT, stop paying your student loans. They are very willing to work with you, and you won't believe how quickly the delinquency charges can rack up. I graduated with $40k in loans (grad school) in 1998, I paid for a few years, consolidated irresponsibly, then hit a rough patch in 2003. I didn't pay for 6 months, which was just long enough for them to default. When I pulled my head out of the sand, and started to deal with them, I owed over $50k, with $11k being delinquency charges. And my credit was in the toilet. Happily, after a couple of years of regular (albeit reduced for hardship) payments, they cut me a deal and settled for $35k to discharge them completely.
posted by kimdog at 3:55 PM on July 1, 2007

Do not declare bankruptcy before the surgery expenses. It would be fraudulent to run up credit card bills knowing that you will declare bankruptcy, but timing a bankruptcy to occur after necessary medical expenses is not fraudulent. In any case, you will be better able to make a decision after knowing what those bills will be and when you can go back to work.

Good luck to you.
posted by happyturtle at 3:55 PM on July 1, 2007

Credit counseling is what you need. I know that many card issuers and banks will sometimes allow you to stop making payments for 6 months if you have a sudden, unexpected hardship.

You can probably do this without suffering a bankruptcy, so go talk to the professionals.
posted by Mr. Gunn at 4:01 PM on July 1, 2007

If you're in Canada, look up "consumer proposals". Much better than bankruptcy. Not sure if something similar exists in the US.
posted by loquax at 4:12 PM on July 1, 2007

as pointed out above, don't declare before your surgery. and yes you're in bad shape but if your medical bills don't go thru the roof for some reason and your wife can find a job in a couple months, it doesn't look like it's hopeless.
and yes, think about getting a second job, temporarily.
sleep is overrated anyway, you'll catch up when your wife finds a job in August.

good luck
posted by matteo at 4:15 PM on July 1, 2007

I used MMI for credit counseling/consolodation, as recommended by MeFites.
posted by k8t at 4:18 PM on July 1, 2007

It will follow you around for much longer than the 7 years everyone claims, and will haunt you worse than the debt you carry now.

Evidence for this?
posted by delmoi at 4:19 PM on July 1, 2007

Btw, when I was unemployed for six months I called my student loan creditors and got a hardship deferral on one for two months and six months on my federal loans. And my credit score went up by a hundred points because my student loans no longer counted on my credit report (!). So if you try to get your student loans differed you might even get a better deal on your medical loans.
posted by delmoi at 4:22 PM on July 1, 2007

On both of my student loans (stafford and Mohela), I had the option of a total of 36 months of hardship forbearance. When I hit a few rough patches, I used most of those 36 months in 6-month batches. YOu may want to look into that, and pay off as much of your unsecured (credit card, I assume?) debt.
posted by notsnot at 4:30 PM on July 1, 2007

Totally anecdotal: I am close to some folks who declared bankruptcy in Canada a few years back, with no other choices available. It was, for them, extremely painless (relatively speaking: it was stressful, of course, and they lost their house), and hasn't had much in the way of long-term negative impact. They live in a small community and have many sympathetic friends and neighbours, though, it must be said.
posted by stavrosthewonderchicken at 5:15 PM on July 1, 2007

I'm not looking for a response specific to the poster, but I'm genuinely curious- how does one run up $33k in unsecured loans, from a practical standpoint, separate from credit card debt?
posted by mkultra at 5:33 PM on July 1, 2007

how does one run up $33k in unsecured loans, from a practical standpoint, separate from credit card debt?

My wife did it coming out of college. She max'd out her credit cards, then noticed that her checking account had a line of credit option that was going unused. So she started writing checks.
posted by Cool Papa Bell at 5:52 PM on July 1, 2007

Are these surgeries absolutely necessary? It seems a bit strange (although perhaps just coincidental) that both of them are happening at the same time. Considering this, and the slight risk that one of them may be problematic and result in more down-time than anticipated, wouldn't it be wisest to space out the surgeries -- say, delaying one until after you wife has gotten the new job?

Obviously, everyone else has told you not to declare bankruptcy. I agree. Realistically this is a lot of debt, but you can get out of it. One option, which sounds weird I know but will work, is moving to a much cheaper country (as far as cost of living). The plane trip may be a bit of an expense to begin with, but you can easily get jobs paying 24k, primarily in teaching English, while paying extremely low prices for housing, food, and goods. Your student loan debt suggests that you might have some grad school as well? Masters graduates are highly sought after in the Middle East and Asia.
posted by Deathalicious at 5:57 PM on July 1, 2007

Delmoi, I need to ask Dad the Accountant, and he's on NYC time. I will check in with him tomorrow and get back to you with an answer.
posted by OhPuhLeez at 6:58 PM on July 1, 2007

nthing the economic hardship on the student loans. The student loan people (i've found) are fairly helpful.
posted by bolognius maximus at 6:59 PM on July 1, 2007

Not sure how well this applies, but I believe you can get out of the student loans in a bankruptcy based on the economic hardship, but it hast to be pretty bad. For example, you could be educated to be a surgeon, and then lose both hands in a freak accident; then you might get undue hardship.

Definitely start looking for credit counseling.
posted by debit at 8:45 PM on July 1, 2007

In lieu of deferment of the student loans, consider setting them up so that you pay a very minimal amount each month. I deferred my loans for a couple of years after college and was horrified to see the amount of interest that added up on some of them.

Also, cut up all your credit cards. Only buy stuff you have the cash for. If you don't have cash, don't buy it.

Several members of my family have declared bankruptcy and it has really screwed up their ability to get a decent car loan or mortgage. Yeah, they still qualify for loans, but only at insane interest rates.

There have been a lot of changes in bankruptcy legislation in the last few years that may make it harder to declare bankruptcy.
posted by pluckysparrow at 9:47 PM on July 1, 2007

Try the credit counseling approach without credit counselors first, if you're the hands-on type. Write up a script and call your creditors to explain to them, rationally, what your situation is, and that you'd like their help in ensuring that you can avoid bankruptcy (an empty threat, since you should realize now that bankruptcy isn't for you, but the creditors don't know that). If the CSR that answers the phone won't help, ask for a supervisor.

Creditors, if you're nice and calm and rational, really do want you to pay your bills without making things worse for you. After all, they want that income from you. If you declare bankruptcy, or even just let your debt slide into collections, they'll have to pay money to collect money. They will TYPICALLY work with you. If you're having awful luck, or they're all assholes, or you're just not the hands-on, slightly confrontational type, get a credit counseling service to jump in.

Just read some reviews of credit counseling services online (find company names in your yellow pages, then look for reviews with those company names online) to be sure you're choosing a good one.

Oh, and it's hard to find credit counseling online, since so many of the online results come from disreputable companies who are out to scam people in a bad situation like yours. So do your homework and find reviews of them!
posted by Merdryn at 8:41 AM on July 2, 2007

Coming back to post Dad the Accountant's answer to Delmoi. The bankruptcy is supposed to come off your credit reports in seven years. In some cases it does not automatically "fall off," in which case, if the person isn't diligent in contacting each of the reporting agencies to clear it, it will just sit there.

Additionally, while the credit reporting agencies are required to get rid of it, legally the credit card companies may not (and he wasn't sure about this, but it has happened to his clients) be required to report the accounts as "Closed. Paid in full." at the end of the seven years. Rather, they may report as "Compromised Debt," with no obligation to ever change that terminology - thereby following the person around for the rest of his or her life...unless they take the time to somehow fight it.

Hope that helps!
posted by OhPuhLeez at 12:35 PM on July 2, 2007