At what point is filing for bankruptcy the wise choice?
- Peter Schneider
- Jun 4
- 4 min read
Recently we have consulted with several people with financial issues who are contemplating filing for bankruptcy. It can be difficult to advise them on what is the best choice for them because trying to dig themselves out of debt seems plausible, but filing for bankruptcy is also a reasonable option for people in their situation.
This article has the conventional wisdom, and then our thoughts.
Conventional wisdom: Only file after exhausting all other options such as debt consolidation or negotiating your debt.
Our thoughts: Exhausting all your options is going to take a lot of time to explore and attempt. While your trying that option, a lot of dollars are leaving your household and aren't coming back even if you file for bankruptcy later. We think it is a better plan to consult with a debt resolution attorney who can quickly estimate what debt negotiation is likely to net you, and if you realize bankruptcy is the right option, don't sink more money into a repayment plan that ultimately you can't afford.
On the other hand, if it looks like you can dig yourself out of debt in a year or so, working with a debt resolution attorney who works on contingency and for a percentage of what what you owe or what he or she saves you pays for itself.
Conventional wisdom: File if faced with lawsuits or aggressive collection action.
Our thoughts: Often clients come to us after being served the first lawsuit on past due debt, and we learn that they are past due on other debt that will probably lead to more lawsuits. Or, we learn this is the only lawsuit coming down the road. Depending on what we learn, we may recommend trying to settle the single lawsuit, or filing for bankruptcy if there are multiple lawsuits brewing. The cost of just defending 1-2 lawsuits can exceed the cost of filing for bankruptcy, and judgments don't look good on your credit either.
Conventional wisdom: File if the stress of debt is taking a serious toll on your health.
Our thoughts: It can be hard to disagree with this. The pain of filing for bankruptcy is more known, and the stress of being in lawsuits or collections for years and repaying debt while keeping your head above water can feel like a worse unknown.
This aspect of filing for bankruptcy and then having a known road to travel to end the financial stress in their life is probably one of the strongest reasons clients cite for filing and we understand the toll on your quality of life financial stress brings. For many clients, living without the debt stress is worth the loss of credit access (for a while).
Conventional wisdom: File if the a large debt you will never repay comes along.
Our thoughts: If you are hit with a large medical debt your never going to repay and the situation is over, bankruptcy makes a lot of sense if the medical providers won't write it off but turn it over to aggressive collections. Likewise, have you been sued for a car accident? Even if your not at fault, with many lawsuits it can make sense to file for bankruptcy before the lawsuit bleeds you for tens of thousands for a legal defense and then a possible judgment.
Our overall thoughts: If bankruptcy is obviously a good decision given your circumstances, we are going to recommend it. But for borderline cases, first, we look to see if a bankruptcy candidate can file for chapter 7 (all debts discharged but a little harder to qualify for) or chapter 13 (the court orders a 3-5 year repayment plan).
We also look at what assets a bankruptcy candidate may have that would make bankruptcy unattractive. If a bankruptcy candidate candidate qualifies for chapter 7, and it would take longer than 18 months to repay all your unsecured debts (and ignoring student loans which are almost never dischargeable) even if consolidated / negotiated, we lean towards recommending bankruptcy.
We say this because while a chapter 7 will stay on your credit for ten years, the major impact will significantly diminish after two years or so, and you will typically regain access to credit. And all the money you would have put into repayment can remain in your bank account.
Our typical bankruptcy client keeps all of their belongings. Cars with loans, if your equity in it is about $15,000 or less [Washington State], can typically have the loan re-affirmed. Same with houses in Washington State. So long as your equity in the house is less than the median home value in the county you live in, you can re-affirm the loan. Retirement accounts are also fully protected,
The thoughts, opinions and musings of this blog are those of Peter Schneider, a consumer advocate attorney at Northwest Debt Resolution, LLC. They are just that, his thoughts, opinions and musings and should be treated as such. They are not legal advice. Do you have more questions? We would be happy to answer your questions:
Bankruptcy and debt questions:
Peter Schneider
206-800-6000 x101
Robocalls and Telephone Consumer Protection Act questions:
Nathen Barton
206-800-6000 x102
Fair Debt Collection Practices Act (FDCPA) questions:
Peter Schneider
206-800-6000 x101
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