Life happens, and so does bankruptcy

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Dear Bankruptcy Adviser,
Life happens. I am separated from my wife but continue to pay for her car (it’s in my name, too) and support for my son. Our house got foreclosed on Jan 2. I haven’t paid a credit card bill in over four months. I probably have around $40,000 in credit card debt. I make good money. I have told credit card companies I couldn’t pay and got a “too bad” kind of response, so I’ve been ignoring them. And I need to start saving money in case I lose my job. What can credit card companies do to me? What do I need to do to qualify for bankruptcy? Supporting two households and a son in day care cleans me out each month.
— Jason

Dear Jason,
You are correct to state that ‘life happens,’ and you can only focus on the present reality and cannot change the past. You are also right to consider bankruptcy. Your situation sounds like it will be impossible to pay back the debt you have incurred.

I will attempt to make sure you do not feel ashamed or feel like you are doing something wrong. You are not.

Around 85 percent of all bankruptcy filings are caused by divorce, unemployment or illness. People have told me that this should not be an excuse for failing to pay your creditors. That’s true. It’s not a good excuse to stop paying your creditors. But, it is the reason for a bankruptcy.

Loss of income or the splitting of household expenses, even if only temporary, can make monthly debt payments difficult. And catching up on payments once you fall behind can be impossible.

Your temporary financial hiccup will not change the due date on a credit card payment.  The creditor has no sympathy for you because their “bottom-line” cannot be altered. And once you miss a payment, all credit card interest rates can skyrocket to the maximum amount permitted by law — sometimes over 30 percent. Therefore, you have to pay on their terms or no terms at all. Period. 

It is the perfect storm.

Bankruptcy happens for reasons like these, not solely because a person racked up credit card debt and hoped to get away without paying it. I have found that this is not the reason why most of my clients need to file for bankruptcy. It is reasons like yours — a temporary glitch occurred in their monthly situation and all things financial fell apart.

At this point, you need to consult with a bankruptcy attorney or learn to file your own bankruptcy. Your case is complicated only because you are still married but have separate household expenses. This situation must be properly reflected in your bankruptcy paperwork or your case can face unnecessary scrutiny and even dismissal.

If you make too much money or have too many unprotected assets, then Chapter 7, also known as a “fresh start” bankruptcy, might not be an option. I think the time it takes to consult with an attorney would be worth it, considering you have a lot at stake.

Here is a game plan: 1) consult with a bankruptcy attorney to see whether you qualify for Chapter 7 or Chapter 13; 2) contact local credit counseling agencies to see whether you can afford a repayment plan; and 3) contact local debt-settlement companies to see whether you can afford to settle your debt.

Once you have explored your options, try to make a decision void of emotion, not based on “what you would like,” but based on what is best for you and your family.