« Bankruptcy Modification and the Emperor's New Clothes | Main | Mortgage Cramdown--Layering On Complexity »

Should I File Bankruptcy?

posted by Katie Porter

Several news stories have tackled this question about when a consumer should consider bankruptcy. In addition to the Newsweek piece that attracted lots of attention, today's New York Times Cost of Living column by M.P. Dunleavey is entitled "Bankruptcy as a Step to Solvency." The column tackles some of the concerns that people may weigh in deciding whether they need bankruptcy, and if so, whether now is the right time to file, including the effect of bankruptcy on credit, the ability to preserve assets, and other strategies such as dipping into retirement accounts to pay debts. Judge Bruce Markell recently came across a "rule of thumb" book that advised that people should consider bankruptcy if it would take more than five years to pay off your debts or you would have to use assets to do so. (Note: the Judge has no position/comment on the appropriateness/usefulness of such a rule). Many of our Credit Slips readers help clients answer this question about whether they need bankruptcy every day, and most of us have had to counsel friends or family about bankruptcy. What is your rule of thumb, if you have one? What is the "last straw" tactic that you think families should avoid and file bankruptcy instead?


In 30 years of consumer bankruptcy practice I have never tried to formulate such a test, unless you count "more debt than you can realistically handle any other way". While I frequently counsel against a bankruptcy filing, I doubt that a test simple enough to be called a "rule of thumb" could ever be useful, for a number of reasons. There are a great many variables, and in case anyone here hasn't noticed, the laws are complicated. People generally do not get to me until they are very close to to the tipping point. Even now, I believe that far more people are effectively ignorant of their bankruptcy options and/or reject those options out of hand, than are too quick to jump in to bankruptcy. A high percentage of potential bankruptcy filers have finances that are too disrupted to make a five-year projection a realistic exercise. The size and variability of interest rates can be a powerful barrier to a self-disciplined workout, even where that might be possible with stable and reasonable interest rates.

I have used a few benchmarks when discussing options with clients. I have frequently recommended that they file bankruptcy if looking into their proverbial crystal balls they cannot see themselves having paid their unsecured debt in full or substantially reducing it within three to five years. I tell them this is about the time it takes to substantially rehabilitate their credit, so their post-bankruptcy credit ratings are likely to be better by that time than if they don't file (assuming they were already defaulted or likely to default on their debt without a bankruptcy) and they will save a lot of money. Most of the time, however, it is unnecessary to use rules of thumb, since most clients aren't cashflowing and aren't likely to in the foreseeable future, so there are no non-bankruptcy options. A large percentage of my clients actually begin with a local debt counseling agency, with no desire to consider bankruptcy, and are told they can't cashflow a repayment plan and should see a lawyer.

I agree, there is no real rule of thumb. Every situation is like a snowflake. Most people don't knock on the door unless they are losing something and by then they should have talked to someone months ago.

One rule that is often overlooked is - file a Chapter 7 on the upswing.

Too many debtors use up their Chapter 7 option too early, when they are not cash flowing and don't have adequate health insurance and are going to be incurring additional debts they can't pay.

Unless an outside circumstance, like a wage garnishment, forces your hand, it is better not to file a Chapter 7 until you can see the light at the end of the tunnel.

Of course, with BAPCPA, you can't actually get out of the tunnel itself or you may not qualify for a Chapter 7....

Chapter 13 is different - you can dismiss at any time, or convert to a Chapter 7 with all of your post-filing debts being discharged. For those who are under-the-median income level, timing issues are less complex.

Of course, not being ready to file doesn't mean not being ready to get some good legal advice: like, don't touch your retirement savings. Period.

Amen! (not legal advice but RIGHT ON, please people talk to someone).

You know we have had UST give us heck about the debtors being in Masters Degree programs and were slated to graduate in the next 2 years. Isn't that some stuff? I didn’t think “potential” was part of it, just a six month average. Ahh, the stuff you see when you are knee deep and it starts all over again tomorrow.

Several months ago I had a incident where some online payday loan companies got ahold of my personal info.....They drained my then bank account dry....I couldn't work with any of them(scams) and so my actual debts fell behind and I was never able to catch up....So I turned to debt settlement and luckily with the first company I found out before I paid them anything that they were money grabbers.....The second one I had signed up and even paid two or three payments(right around $500). I would ask for updates and they would tell me everything was working smoothly, then I got a judgement in the mail, the "so-called" debt settlement company starts asking for my bank account info again and says they need to update......All the while my contact person has disappeared, then I get my last paycheck garnished........I am out of work right now and have no income whatsoever.....I'm supposed to be able to draw unemployment but there's a hold up there....I drove an hour one way to and from work(live in KY and work in VA). It got to where I was spending money than I was making in car repairs and buying gas.......I live with my parents, but I take care of my own bills(or did).....Is it possible I could file chapter 7 bankruptcy??? Thanks

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.