Is It OK to File for Bankruptcy?

Q: We have accumulated a lot of debt this past year, not surprisingly. It is both personal debt as well as business debt. The question now is, what to do about it? I think we should file for bankruptcy, but my wife vehemently disagrees. Any suggestions?

Len

A: I practiced law full time for many years, and this was one of my areas of specialty -- helping businesses, and consumers for that matter, deal with finances and debt issues. Often times, that meant filing a Chapter 7 bankruptcy for them. Other times it meant filing a Chapter 13, and yet other times we negotiated private settlements, and even at times the best thing was to do nothing.


If you have a lot of business debt, and can't pay your debts in full, those are your basic options. Let's look at each.

Bankruptcy: There is good news and bad when it comes to bankruptcy. The good news is that it can make your life easier in the short run. The phone will stop ringing, the pressure will dissipate, and you will sleep better at night. Yes, there are means tests now, and you have to get some counseling, but if you qualify, in the end your unsecured debts will be eliminated. The only time I ever received a thank you note when I practiced law was after a Chapter 7 case was over and the folks were out of debt.

The bad news is that it will harm your credit rating for several years (it will be on there for 10, but the damage really is the first few years out.) In a Chapter 7, you will likely have to close the doors to your business and liquidate any assets over limits set by your state, but your lawyer can explain this better.

A Chapter 13 is a sort of reorganization whereby your business stays open and you pay a percentage of the money you owe over a 3 to 5 year period. At the end, if you have made your payments, any "balance" is wiped out. Legally, the term is "discharged."

Bankruptcy usually is the option of last resort, and it should be, but in the right circumstances it can make things a lot easier for you.

Negotiated settlement: Sometimes you can get out of debt without having to resort to bankruptcy. Here, you would negotiate a deal with your creditors. The secret is to have some lump-sum money ready to pay them. If you do, you just may find that they would be willing to take less than the amount you owe, in exchange for getting an aggregate payment right now. This process can end up with you paying 75 cents on the dollar, 50 cents on the dollar, and sometimes even less than that, depending on the circumstances.

It is important that if you do this that you make sure the creditors agree that the debt will be considered "paid in full" for the lesser amount and that they will report your accounts to the credit reporting agencies as having a zero balance, once you make your large payment.

Get it in writing.

Do nothing: As I said, sometimes this is the best course of action. For instance:

- If there is a likelihood that things will be improving soon
- If things are not so bad that the drastic measures listed above are necessary
- If you own a lot of assets, so a bankruptcy makes no sense

Of course, the problem with this method is that 1) it leaves you, and your creditors, hanging, and 2) they will not leave you alone.

In that case, if it is consumer debt, write to the creditor and tell them that pursuant to the Fair Debt Collections Practices Act, they are to leave you alone. They must do so, after being given that notice, but they still can sue you.

All of these methods will damage your credit rating, so proceed with caution and speak with an attorney in your area.