When is Personal Bankruptcy the Right Choice?by
Although the idea of filing for bankruptcy often has a negative connotation, there are times when it might be the best course of action for a debt-ridden client to pursue. Bryce Sanders explains cues it's time to talk to your client, as well as the benefits and drawbacks of declaring bankruptcy.
Credit card companies never think declaring bankruptcy is your best course of action. Neither do loan sharks. However, there are times when declaring personal bankruptcy can make sense. When a person considers this option, their accountant is likely their first call.
When Does Declaring Bankruptcy Make Sense?
Bankruptcy hits the pause button on calls from collection agencies and mounting interest and penalty charges. It can erase debt and keep creditor’s hands off your paycheck. It almost seems too good to be true, as if you are given a “do over” for your personal finances.
Here are a few situations where bankruptcy might be considered an option.
- The numbers are too high: Accountants would do an insolvency calculation. If the face value of debt id greater than the value of assets and there’s no way to pay it off, declaring personal bankruptcy is an option. Could they borrow from family member? How about the expectation of an immediate inheritance? Then they might avoid bankruptcy.
- Huge medical bills: You or a loved one wasn’t covered by insurance or you reached the lifetime cap amounts on your coverage. The bills continued to pile up.
- Out of control consumer debt: You have multiple credit cards, at or above your maximum limit. Since you haven’t been making payments you are charged interest at the penalty rate, the highest amount legally allowed.
- Inability to consolidate debt: There are many programs that will aggregate your high credit card debt into one big loan at a lower rate of interest. Even they won’t touch you.
- You have no assets: You have nothing left to sell. No house. No cars. No investments.
- You cannot get future employment: You were living a lifestyle expecting great things to happen on the job front. Circumstances changed. You lost your job. It’s unlikely you will find employment anywhere near that income level again.
- You have incurred the debts of others: You cosigned their loan. Maybe they loaned all your money to a family member who lost it all. They have no way of recovering it.
The Benefits of Declaring Personal Bankruptcy
There are different types, but Chapter 7 and Chapter 13 are the most common. Bankruptcy is considered a practical course of action for several reasons:
- Removal of personal debts: Credit card companies and other creditors might get partial payment through the sale of your assets, but the balance of monies owed is discharged.
- Collection calls cease: They can’t chase after you anymore.
- It isn’t forever: After seven or ten years, personal bankruptcy is removed from your credit history.
- Living expenses are permitted: You are allowed enough for food, clothing and shelter.
- Sometimes you can keep your house: This is usually referred to as the homestead exemption. It depends on the rules in your state.
- You cannot lose be fired from your job solely for a bankruptcy: Logically, they could find other reasons.
- Payroll garnishing stops: Your creditors cannot get to your salary before you do.
- Bankruptcy is not a reason to be turned down for a public sector job: The government can’t discriminate. This doesn’t apply to the private sector.
The Downsides of Declaring Bankruptcy
If it was easy to walk away from your debts, you would think more people would do it.
- Damage to your credit rating: It quantifies your degree of risk to future lenders. It looks very bad. On the other hand, your credit rating might have already fallen dramatically getting yourself to this point.
- Loss of assets: There are circumstances where you might be allowed to keep your home, however it assumes you are current on your mortgage payments and the bankruptcy exemption will cover the amount of equity you have in your house. If your home equity is greater than the bankruptcy exemption, your creditors are entitled to part of it.
- Difficulty finding future employment: If you are seeking a job in the private sector, future employers can perform a credit check, which will show the bankruptcy. This can be a big concern if the job involves handling money. There can be many reasons why one applicant is chosen over another.This could bring you further down the list.
- Not all debt disappears: Child support and alimony are still a responsibility. Not all tax obligations disappear. Debts from certain lawsuits or judgments where you caused injury to another are still a responsibility.
- Disruption of your children’s education: If your child is in private school or college, this will severely impact your ability to pay.
Declaring personal bankruptcy isn’t like adding an app to your smartphone. It’s a process. They will need to hire a bankruptcy attorney. As their accountant, you will likely be involved, too. These professions expect to be paid upfront for obvious reasons. Like marriage, it’s not a state to be entered into lightly.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.