Dear Bankruptcy Adviser:
I have a question concerning my debt situation. I owe around $60,000 in credit card debt. I am currently not employed, but working on a business that is not profitable yet and I really have no timeline as to when I will see income flowing in.

My savings are drained and I have been borrowing money from friends to make payments for the past few months. However, it has come to the point where I am no longer able to do this and my monthly payments for all my bills are too high. What would be the best option for my situation?

Should I try a debt consolidation agency, which I’ve researched might not be the best solution unless I have money to settle; file for bankruptcy or default on all my credit card debt? I’m not sure exactly what happens if I just default and don’t file for bankruptcy. Are there any legal implications?
— Dan

Dear Dan:
The key sentence to your question is: “I am currently not employed …” While you are trying to get a business off the ground, all your options to pay back your debt are nonexistent without a steady income flow. You need to be careful not to rob Peter to pay Paul, which is the most common comment I hear from clients. Meaning, don’t pay your Visa with your MasterCard.

You ask all the right questions as to your options. I will break down your options and explain how these relate to others in similar situations.

Debt consolidation: Any reputable debt consolidation company, or DC, would not take you as a client. You do not have the funds to complete DC programs and will likely make a few payments to the company, which will cover their fees only, and then find it impossible to pay. I feel that DC programs work only when you have large lump sums available to make significant payments to the creditors right away.

DC companies contact the creditors and “establish” settlement terms. But those terms are based on your ability to pay those terms within 12 to 36 months. Unfortunately, I have retained many people who made at least 12 payments into a DC program only to find that the settlement terms changed or that in the two-plus years the creditor has been waiting for payments the balance has increased significantly. Thus, a 20-percent settlement offer increased because the balance also increased.

Credit counseling: This does not appear to be an option for you either, because you must be able to make a monthly payment over the next three to five years. Reputable credit counseling agencies will not take you as a client because you will be unable to keep up with the payments.

Default on the payments: The “stop paying and hope for the best option” does not usually work. This can also be called the “head-in-the-sand” approach. Unless you are over 65 years old, have no assets and limited income, one or more creditors will likely sue you. Having delinquency marks on your credit report followed by judgments will make it very difficult for you to re-establish positive credit.

Bankruptcy: Don’t jump into this too soon. Some issues to consider before filing bankruptcy are how quickly you ran up the debt, and whether you have made cash advances or significant balance transfers, or if you’ve made big-item purchases — like equipment for the business. While you likely will qualify for bankruptcy, you want to make sure that creditors are not going to claim that some of the debt ought not to be eliminated because you ran up the credit cards. An experienced bankruptcy attorney can assess your situation and uncover any potential problems with filing bankruptcy.