When Should a Client File for a Ch. 7 Bankruptcy?
The decision to petition for Chapter 7 Bankruptcy is a daunting and stressful one. I consistently see clients whose stress grows almost daily as their debt increases, as bills keep coming, and as their options seem more limited. To help clients decide whether this worrying decision is best for them, I use three different variables: 1) total debt accumulated; 2) medical needs; and 3) available alternative retirement funds.
1. Total amount of debt.
Most people who consider a Chapter 7 Bankruptcy — which is a complete discharge of all unsecured debt — are unemployed or simply lack a sufficient income to satisfy their financial obligations. Typically, in this situation, it becomes apparent that people with at least $10,000 in debt will likely benefit from a Chapter 7 petition. (Any lesser debt and the debtor is better suited speaking with a credit consolidator.) Naturally, for every dollar over $10,000 in debt, the benefits of bankruptcy improve.
2. Foreseen medical expenses.
I speak to many people considering bankruptcy who are in the middle of a healthcare battle. These clients worry about paying off their growing medical expenses. Fortunately, medical bills are an unsecured debt, and thus can be completely discharged in a Chapter 7 Bankruptcy. Given that, it is best to wait until all anticipated medical expenses are incurred before proceeding with Chapter 7 Bankruptcy. This approach might seem a little underhanded to some, but for those facing bankruptcy, survival often trumps moral ramifications.
3. Available retirement accounts.
The most important advice I provide to clients considering bankruptcy is this: save your retirement money. Unfortunately, all too often clients resort to bankruptcy only after they have already spent their retirement savings paying off debt. But retirement accounts, including 401k accounts, IRA accounts, pensions, life insurance, and certain annuities, are protected during a Chapter 7 Bankruptcy. So clients should always hold onto their retirement accounts until their final decision regarding whether to proceed with a Chapter 7 Bankruptcy is made.
In sum, analyzing these three variables when talking to clients about whether bankruptcy is best for them can help the decision be more informed and ultimately better made.