One of the surest ways to determine whether you should consider filing a bankruptcy is to determine whether you can pay off your debts in less than 5years. If you cannot, consider whether you will ever be able to meet your financial goals while still carrying your current debt load. For example, assume you have $30,000 in consumer debts (credit cards, store charges, finance companies). Exclude your payments on your car (you need a car) and on your house, if you own one (you need a place to live). Payments on car and homes are somewhat "fixed" debts. Most people want to keep these assets and will come out of bankruptcy still making payments on their cars and houses. A bankruptcy does not usually affect these debts unless you want to give back the car or home (which, if you are current, is generally your decision).

 

Now that you have added up your "consumer debt," add in any debts to the IRS and student loans. In this example, I am assuming that all of these debts add up to $40,000. Now add a 20% interest rate to this debt (although interest rates vary -some will be higher, and some will be lower). If you make the minimum payments totaling $800.00 per month, it will take you 108 months, or 9 years to pay off the debt. That would be 9 years where nothing else can go wrong, like a car or home repair, surprise medical bill, or anything else. To pay this amount off over 5 years (our target period for looking seriously at a bankruptcy), you would have to make monthly payments of over $1,060. Do you have $1,060.00 per month to effectively pay off your debt of $40,000 in a realistic time period?

 

PLEASE NOTE: ALL OF THESE CALCULATIONS WERE DONE WITHOUT LATE CHARGES, OVER THE LIMIT CHARGES, AND THOSE SURPRISE INCREASES IN INTEREST RATES ON CREDIT STATEMENTS. Although you, like all of my clients, want to avoid bankruptcy, look at it objectively, and do the math. Can you pay your debts off in a reasonable period of time while still keeping up with regular expenses? If not, bankruptcy is a good option.