I spend a lot of time trying to convince people not to file bankruptcy without first looking at all of their options. Sometimes, when you have what seems like a hundred bill collectors calling you every day, it feels like there is just no possible way out of the swamp that is debt, and the only way for you to ever have a somewhat normal life is to throw in the towel and file bankruptcy. THAT IS NOT TRUE. You do have alternative options.

That said, there are times when bankruptcy really is the only realistic choice. Knowing just what is best for you requires you to sit down with a licensed professional and discuss your particular situation in detail. But here are some typical situations where bankruptcy is the best option:

A. You have a TON of small creditors. Like, more than 20 separate entities trying to simultaneously collect from you. There is no rule that says debt settlement or collection lawsuit defense won’t work for you just because you have a lot of different creditors. It’s just that dealing with each of them separately will either take a) a lot of your time or b) a lot of lawyer fees.

Now, depending on the amount of the debt and/or time you have, Debt Settlement still may be the way to go.  I charge $100 per account, plus 10% of the money I save you.  If you have the income to make payments, but not the time to deal with lots of creditors, it may be worth it to hire a lawyer to settle your accounts for you.  For example: You have a $5,000 credit card account with Chase.  You hire me for $100.  I settle the debt for $2000.  You owe me $300.  Your total debt was $5,000, but you end up paying $2400.  Less than 1/2.  Still a good deal if you can afford it.  Better than bankruptcy if you care about your credit report.

But, if you have lots of accounts, then settling or litigating them all could take a year or two.  Some people just can’t stand to have their financial lives in limbo for that long.  And I understand.  Bankruptcy, by contrast, forces all of your creditors into the process.  You’re in and out of Chapter 7 in about 3 months.  Chapter 13 cases take 3-5 years, though, so the time factor is not as important if you cannot file Chapter 7.

B.  You are about to lose something you cannot afford to lose.  Like your home or your only vehicle.  Chapter 13 bankruptcy allows you to keep your car from being repossessed and your home from being foreclosed.  Chapter 7 will stop those things for a few weeks, but the Bankruptcy Code lets your creditors have relief from the stay (meaning they can come after your stuff) unless you can bring them current and keep paying for them.  If you cannot get a loan modification and a foreclosure is coming up, then Chapter 13 may be your only option.

C.  You are underwater on your vehicles.  Unfortunately, auto loans are nearly impossible to settle for less than the amount owed without first surrendering the vehicle.  So if you want to keep your vehicle and you have a lot of debt, bankruptcy can actually help you lower your payments on the vehicle if it is underwater.  How?  Well, there are two ways, depending on the sort of bankruptcy you file.  In Chapter 7 bankruptcy, you can redeem the vehicle for what it is worth – NOT what is owed on it.

What?

Yeah.  So here’s how it works.  Say you have an Escalade worth $15,000, but you bought it with a 7 year loan with a huge interest rate, so you still owe $30,000.  If you can somehow come up with $15,000 after the bankruptcy is filed, (because if you have that cash laying around before it is filed, you’ll lose that money to the Trustee) you can pay that creditor $15,000 and he has to release the lien.  Period.  Ain’t that cool?  Of course, the hard part is finding the money.  There are companies who specialize in bankruptcy lending, and I’ve dealt with them before and gotten some clients some great deals.  Your attorney should know about them.  If your lawyer doesn’t know about redemption, get a new bankruptcy lawyer.

Chapter 13 (the one where you make payments for 5 years) has a similar provision that allows you to pay off a vehicle for less than the amount owed by paying the creditor the value of the vehicle (at current market interest rates – which is usually better than your contract rate) rather than the balance of the loan.  One caveat: this ONLY works if you bought the vehicle more than 2.5 years before you filed the bankruptcy.

Chapter 7 redemption does NOT depend on when you bought the vehicle.  If you bought it at least 90 days before filing bankruptcy, you can still redeem the collateral and stiff the creditor for their underwater loan portion.