Dear Bankruptcy Adviser,
I currently have student loan debt of $100,000-plus and credit card debt of more than $65,000. I work extremely hard, have never made a late payment, and have relatively low interest rates on my credit cards. I can afford the student loan payment on my salary, but not the credit card payments. I am considering filing for Chapter 7. I don’t own a house or a car and I have no assets because I can’t save anything because of the debt. What should I do?
— MJ

Dear MJ,
You are in a difficult, but common situation. Many students leave school with both student loan and credit card debt even before landing their first full-time job. Quite often, student loans cover only the essentials — tuition, books and some living expenses — leaving credit cards and part-time work to pay for ordinary and necessary living expenses until completing school.

On one hand, I hate bankruptcy. Even though this is how I earn a living, I also understand how difficult life after bankruptcy can be for many people. You may already feel like you failed at something (although I would disagree) and then you might face unreasonable challenges getting a new job because of your negative credit rating. The exalted status given credit reports is because former employers no longer are allowed to give personal references. Credit reports became an important, but completely improper, indication of whether a person is employable.

Do I think this is fair? Absolutely not. But this current environment exists because attorneys sued employers who had given negative references about former employees. While many of those lawsuits had merit, the unintended consequence is that your credit report now holds power over your future.

On the other hand, you are faced with an almost impossible situation. The first thing to do before filing bankruptcy is a self-administered test. The test is simple, but accepting the results emotionally can be very difficult. When prospective clients are hesitant to file bankruptcy, I suggest that they perform this test over the next two or three months. Most prospective clients will call back within a few weeks when bankruptcy appears to be the best alternative.

First, try to cut back on “entertainment” expenses as much as possible. This will free up a little more money during the test period. Second, performing the test depends on the manner in which you are paid. Those paid once a month will find the test a little easier to perform. Those paid biweekly (every other Tuesday, for example) or semimonthly, usually have to pay rent and/or car payments with their first monthly paycheck. The second paycheck typically goes to credit card payments.

Self-test: Try to pay the minimum payment on each credit card either at the beginning or by the middle of each test month.

If you cannot afford the minimum payments, then you must consider Chapter 7 bankruptcy. If you can afford the minimum payment only, but you still need to use the cards before the end of the month for reasonable and necessary expenses, then you must consider credit counseling or bankruptcy — Chapter 7 or Chapter 13.

If you can afford the minimum payment plus 3 percent to 5 percent more, but you still end up using the cards by the end of the month, then you can look into credit counseling or bankruptcy — Chapter 7 or Chapter 13.

Do not kid yourself. You need to see a true picture of your financial situation or else you will waste thousands of dollars, only to find yourself in the same position years later. Once you complete this basic test, look into these options prior to filing bankruptcy:

Call the creditors. Try to negotiate lower or frozen interest rates. It is worth a call to see whether the creditor will work with you. There is no guarantee, and you ought to determine whether you qualify for bankruptcy prior to calling the creditors. If you qualify for a Chapter 7, then the creditor might be willing to work with you rather than lose the entire balance. Don’t threaten the creditor with bankruptcy, but having that information will let you know whether the deal is a viable one.

Credit counseling. Contact a local consumer credit counseling agency and request a consultation. Make sure you do not lowball your monthly expenses just to qualify. You must be able to comfortably afford the monthly payment or else you will only waste money. Do not sign up for credit counseling unless ALL your accounts can be included in the repayment plan. You will find it difficult or impossible to make additional payments outside of the credit counseling plan.

Debt negotiation. This may be impossible in your situation unless you can produce lump sums to pay the accounts immediately. Additionally, creditors might demand 80 percent to 100 percent of the outstanding balance if you have a good paying job and are under age 45.

Debt negotiation companies will state that they can obtain settlements at 40 percent of the outstanding balance, but that is only an estimate. It is impossible to guarantee a low settlement amount, especially when you are young, college-educated and have potential to earn a good income. The creditor may prefer to sue you and get a judgment that is enforceable for over 30 years. Do not waste your money unless you can produce significant lump sums immediately.

Stay committed to any decision that you make, MJ. Failing to act will only prolong your current feelings of frustration.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “bankruptcy” as the topic.