Ask Stacy: When Should You File Bankruptcy?

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Here’s a recent email from a reader that offers the opportunity to talk about when enough is enough.

Dear Stacy,
I know you deal with a LOT of debt collection questions, but I couldn’t find the answer to mine in a search of your website–maybe I don’t have the right terminology.

Isn’t there any way to get debt collectors, including credit card companies, to pause the debt collection process or the payments for a period of time? I am disabled and awaiting SSDI determination (it may drag on another year) and completely out of money now, living with family just to survive.

Citibank refused to work with me on a payment low enough for me to continue paying them, which would have at least given them assurance that I had not abandoned the debt. I suggested the same $5 a month I pay a on a medical debt, as I can usually make a very little each month holding yard sales of my last few possessions. Citi wouldn’t accept anything less than $200+/month. So this account has now gone to a debt collector who has offered to settle for less than the full amount, but it’s still way more than I can currently pay. And in the meantime Citi continues to charge me $35/month in late fees and 29% interest rate on the overdue amount.

When I spoke to Chase about my overdue account with them, they transferred me to a debt management company, that also could not help me since debt management plans require INCOME! Given that I can’t afford a lawyer, is there some action that can get these agencies to at least stop charging penalties each month when I’ve already appraised them of my situation? What about a means of temporarily halting the collections process until I can get SSDI? I have already sold my furniture trying to pay these guys, and don’t have the money to pay for the medical treatment I need to stay alive now! The stress of constant calls and letters from collectors is adversely affecting my health. If I drop dead before Social Security Administration admits I’m disabled from illness I can’t pay Citi or Chase at all–they’ll just be beating a dead horse. And I’m not withholding any money from them–you just can’t squeeze water from a stone!

Why aren’t there protections for people who are the worst off of all? I have tried repeatedly to help myself out of this situation, but nothing works. Any suggestions? Or am I just sunk?
– Jane (not her real name)

Jane, there is protection for people who are the worst off of all. It’s called bankruptcy, and you need to think about it.

I wish Jane had contacted me earlier. Like many others in her situation, a strong sense of pride combined with a lack of knowledge is keeping her from acknowledging the inevitable. As a result, she’s needlessly enduring monster stress and pouring what money she does have down the drain. It breaks my heart when I see words like “I have already sold my furniture trying to pay these guys, and don’t have the money to pay for the medical treatment I need to stay alive now!”

This is exactly why we have bankruptcy laws. (And why I’m for guaranteed health care for all Americans – but that’s another story.)

When you should file bankruptcy

You don’t often read articles by personal finance writers suggesting bankruptcy. Instead, we prattle on about building budgets, targeting debts, and squeezing additional savings by using coupons and buying generics.

That kind of advice is fine for many people…even most. But it’s useless for people like Jane.

The magic word when it comes to debt problems is “income.” If you have it, debt problems are often solvable. If you don’t, they’re not, especially when you’re in Jane’s situation: no savings and no prospects for significant future income.

In a story I did a few years back called “Dealing With Debt: Bankruptcy,” the lawyer I interviewed gave me some simple advice: If you don’t have enough income left after eating and putting a roof over your head to make even minimum payments on your debts, it’s time to talk to a lawyer.

What about your moral obligation?

If you’ve read much of my stuff, you know that I’m a believer in paying back what you borrow. (See Website Says It’s OK to Walk Away – No It Isn’t.) But Jane’s situation is a textbook example of why we have bankruptcy laws. Sometimes bad things happen to good people, and the last thing those people need is to be verbally abused by collection agencies or made to feel guilty.

When a credit card or other company loans you money, they understand the risk they’re taking. The interest rate they collect compensates them for it – often handsomely.

In How Much Tax Do the Most Profitable Companies Pay?, we point to a study from NerdWallet that reveals the profitability of many of America’s biggest companies. If you think companies like Walmart are monstrously profitable, you’re right: Walmart made $24 billion last year – $2 billion a month. But guess what company also made $24 billion? Wells Fargo Bank. JP Morgan Chase, one of the companies Jane owes, made even more: $26 billion.

You owe your creditors your best effort to meet your obligations. But you don’t owe them your health, your life, your sanity, or your self-respect. If you’ve done your best, put your head up, shoulders back, and deal with it.

Jamie Dimon, JP Morgan Chase CEO, took home $23,105,415 last year – he’s going to be fine.

How do you pay a bankruptcy lawyer when you’re broke?

Just because bankruptcy is the correct course for people like Jane, however, doesn’t make it easy. In the ultimate Catch-22, many Americans don’t have enough money to become bankrupt. In an article called Too broke to go bankrupt, CNN/Money says hundreds of thousands of Americans can’t afford the $1,500 to file bankruptcy. Result?

“It ends up being the relatively better off, or middle-class consumers who can actually afford to file, and the people with lower incomes can’t afford to file.”

Have you ever read stupider words? Only people who by definition aren’t broke can afford to go broke. Sometimes life is truly stranger than fiction.

What Jane should do is find a local bankruptcy attorney and get a free consultation to explore her options, like perhaps creating a payment plan or finding a pro bono (free) lawyer. But she shouldn’t be surprised if that attorney ends up saying something like…

Sometimes the best course of action is to take no action

In her email, Jane says “you just can’t squeeze water from a stone!” She’s right.

Bankruptcy is a good option for those who can’t pay their debts, and that’s especially true for those with assets to protect, like a house, expensive possessions, or a decent income.

Without the protection afforded by bankruptcy, your creditors can file a lawsuit for unpaid debts that could result in a monetary judgment against you. With that judgment in hand, they’ll go on an asset search to see if you have anything valuable they can force you to sell to satisfy the judgment. They could also potentially garnish your future wages to collect it.

But if you have few possessions and meager income, creditors or collection agencies may not bother suing, because it’s expensive and likely to be a waste of effort. You’re essentially “judgment-proof.” Given what we know about Jane’s case, that’s probably exactly what she is. She should still, however, turn to an attorney for a free consultation and an expert, empathetic ear.

In summary, Jane, here’s what you should do

  1. Stop paying your debts. You’re not going to be able to repay your creditors with $5 a month anyway, and that money means more to you than them. Stop throwing it away.
  2. Stop selling your stuff. No matter what you do, nobody will ever have the legal right to strip you of simple personal possessions.
  3. Don’t worry about the late fees. You’re not going to pay them.
  4. Don’t worry about your credit history. It’s already trashed, and you don’t have the resources at this point to defend it. Water under the bridge.
  5. Stop the collection calls. There’s no law requiring you to talk to any creditor or collection agency. There is a law, however, that says you can stop their calls simply by telling them to quit contacting you. These people don’t care about you – don’t talk to them. Read this page of the FTC website for more about your rights.
  6. Talk to a lawyer. It’s not going to cost you a dime, and it’s going to make you feel much, much better. I guarantee it.
  7. Stop beating yourself up. You didn’t get drunk and run over someone’s child. You became disabled and are unable to pay a couple of bills. It happens every day. You have nothing to feel guilty about. If you ultimately regain your financial footing, fine – you can always pay them back then.

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Comments & discussion

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  • http://freshstartsolutions.com.au/ Fresh Start Solutions

    All the
    things you have discussed here are really so important and should be noted.
    People should not pay off debts to friends and family members; they should
    know that this will not keep them out of the bankruptcy process.