Huge Debts? Maybe Bankruptcy Isn’t the Right Option

As a new year gets under way, many consumers are looking at their finances and trying to decide how to best improve them. When setting financial goals, it makes sense to consider feasibility. For some, the idea of bankruptcy is attractive because it seems like the most feasible option when they have a lot of debt. However you ended up in debt (medical bills, or an unexpected financial catastrophe), you might think that the thing to help you start over is bankruptcy.

This might not be the case, though. According to Mark Hankins, an attorney and the author of Debt Hope: Down and Dirty Survival Strategies, filing for bankruptcy protection when you have large debts might be counterproductive.


Why You Might Not Want to Use Huge Debt as a Reason for Bankruptcy

“It seems counterintuitive, but many folks who owe huge debts to lots of people find that none of those creditors — or perhaps just one or two — actually sue them,” says Hankins. Having a lot of debt, though stressful, might actually be a bad reason to file for bankruptcy.

“Creditors look at what they might actually recover,” he continues. “In bankruptcy, they’re going to be treated equally by the bankruptcy, which means that whatever pie might be there for them in the way of your income or assets is going to get sliced mighty thinly.”

Hankins says that most creditors, especially if you have large debts owed to multiple creditors (and creditors can find this information by looking at your credit report) won’t bother suing you. Even collections agencies might not bother too much if there isn’t a great likelihood that you will actually be able to pay. Instead, he points out that, “Once the statute of limitations on your debt expires, you’re in the clear.”

Of course, that doesn’t mean that you should avoid your obligations if you can pay them. In some cases, it makes sense to create a slow and steady debt repayment plan that allows you to pay down your debt without filing for bankruptcy and further damaging your credit. However, if you have reached an untenable situation due to rather unfortunate circumstances, Hankins thinks that you can use what’s called an “informal bankruptcy” to reduce your distress.

With the “informal bankruptcy,” a subject he says has been covered in academia, you find out about the statute of limitations on your debts, and simple ride it out until that date comes up. As with other failures to pay your debts, your credit will be impacted. You’re going to have to try to rebuild your credit after you take this tack. However, you won’t have filed bankruptcy, and that can free you up a little bit for other options down the road. Hankins says you can’t file for bankruptcy again for at least eight years, and “a lot can happen in those eight years that could cost far more.”

In the end, if you are struggling with large amounts of debt, it makes sense to talk to a knowledgeable and legitimate third party who can help you figure out your options, and determine the best course of action.

About the Author

Miranda writes about financial topics for several web sites. Her blog is Planting Money Seeds, and her book, Confessions of a Professional Blogger, is available on Amazon.