Consumer Law

Budgeting for Bankruptcy

By Sam Glover

Bankruptcy makes sense when two things are true:

1. You cannot afford to pay your debts; and
2. You could afford to live within your means if you got rid of your debt.

Chapter 7 bankruptcy can wipe out your debt, but it can’t make you cash-flow positive all on its own. Nearly every consumer has met the first condition by the time they work up the courage to meet with a bankruptcy lawyer. Fewer meet the second.

The second condition is really asking whether bankruptcy will solve your financial problems. When you go through pre-bankruptcy counseling, take a second look at the budget you create with the bankruptcy counselor. If you subtract all the loan payments you are making now, will your income be sufficient to pay all your expenses? If it will, great. Go ahead and call that bankruptcy attorney.

If not, you need to figure out how you will live within your means once you declare bankruptcy. If bankruptcy will not solve your financial problems, you will almost certainly begin racking up new debt shortly after you file, but at higher interest rates, and with years until you can try to get a fresh start from bankruptcy again.

So dig into that budget. Figure out how to cut it down to size, or figure out how to find a second (or third) job to balance the budget. Once you have figured out how to avoid going further into debt after you file bankruptcy, go ahead and file!

(photo: http://www.flickr.com/photos/kukywa/2297694568/)

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Full post as published by Caveat Emptor on February 01, 2011 (boomark / email).