Is bankruptcy an option when illness wrecks finances?

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Opening Credits with Eric Sandberg

Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

Ask Erica a question, or see if your question has already been answered in the Opening Credits answer archive.

Due to illness, I fell behind on my credit card bills. Can I or should I file for bankruptcy?


Even
if your income exceeds the median
needed to qualify for bankruptcy for
your state, as long as you prove that there is not enough money left over after
meeting your essential expenses to cover your debts, there is a solid chance
you’ll be approved. But meet with a credit counselor first to see if that’s the best course of action.

Expert Q&A

Check out all the answers from our credit card experts.

Dear Opening Credits,
I recently contacted a bankruptcy
attorney and was told I did not qualify for Chapter 7. I dropped the ball a
little over year ago after almost dying from an acute kidney injury. Even
though I managed to survive on Social Security Disability Income and live OK,
something happened to me after that with my cognitive skills. I started making
poor financial decisions. I can no longer keep up. This last pay period I
didn’t pay two of my highest balance credit cards. I don’t know what to do. Do
you have some sort of resource or link to some guide that can help me? I want
to salvage what I can. I have multiple myeloma and was given 3-5 years to live
in 2007. I’m still alive and will turn 44 this year. I have an awesome wife who
helps support me. This has gotten me super depressed. Any tips or suggestions
would be greatly appreciated.

Dear Al,
With
your medical condition it may be very difficult to prioritize right now, so let
me assure you that financial problems should take a back seat to health
problems.

Why
you were told you couldn’t discharge your debts is confusing, so I reached out
to Leon Bayer, a Los Angeles-based bankruptcy lawyer,
for insight. It may be as simple a reason as going to the wrong attorney.
“Bankruptcy laws are unbelievably complex,” he says. “Lawyers without a long
career of specializing in bankruptcy law will often lack the analytical
training and experience to give a client the correct bankruptcy advice.” It is
not unusual for people who do qualify to be told they don’t. 

More
on bankruptcy in a moment. Here is what I want you to do now.

Start with a detailed budget

With
your wife, sit down and lay out your entire financial situation. For materials,
all you’ll need is a piece of paper, a pencil and a calculator.

  1. List all of your living expenses (housing, utilities
    groceries, transportation, medical care, etc.) and what each costs on a monthly
    basis. Be realistic. This is not the time to undercut food or medication. Add
    it all up.
  2. Tally what you and your wife bring in from your income
    sources for the month. Subtract the total of your expenses from it. Where you
    stand will be clear. If there is a deficit, pick up that pencil and rewrite
    your financial picture. Reduce truly unimportant expenses (such as cable TV or
    a landline) until you at least break even. The goal is to make sure you have
    enough to live comfortably.
  3. In the event there is money left over, consider your
    creditors.
    Take the credit card bills out and review the monthly payments for
    each. If you can truly afford to pay them, fine. Go ahead and start to send
    them payments again.
  4. Can’t meet the payments? Stop trying. Visit the U.S. Department of Justice to locate a credit counseling agency in your area that
    provides budget and debt advice as well as bankruptcy counseling. It’s a free
    service and your counselor will analyze your income, expenses and liabilities
    in detail. If you missed some reasonable method to increase your cash flow,
    decrease spending or liquidate assets so you can satisfy your bills and
    possibly your creditors without sacrificing your health (financial or
    physical), you’ll find out. If not, you’ll be routed to their bankruptcy
    education department. Take the recommended bankruptcy course and you’ll soon
    know if you really are eligible for a Chapter 7. 

During your appointment with the credit counselor, they may bring up a debt
management plan
. This is a service offered by credit counseling agencies and designed to get people out of debt within three to five years. It’s offered
to people who can cover their living expenses (which includes a little extra
for savings) as well as their minimum debt payments. If the counselor presents
it as an option, consider joining, because it can give you the relief you’re
seeking. However, don’t be disappointed if it’s not. One of the basic
requirements is that you’re working and not receiving government assistance,
and it will never be offered to clients who are better off focusing on their
necessary expenses. 

Even
if your income exceeds the median
needed to qualify for bankruptcy for
your state, as long as you prove that there is not enough money left over after
meeting your essential expenses to cover your debts, there is a solid chance
you’ll be approved. So, if bankruptcy seems right, find an experienced law firm
that specializes in bankruptcy law in your area.

“Your
best source for reliable bankruptcy advice will be with a bar certified bankruptcy
specialist,” says Bayer. “Stay away from the bankruptcy mills who advertise
with promises that are too good to be true on the TV and radio. There are deep
exceptions embedded in the bankruptcy laws that allow many people to qualify
that poorly trained lawyers just don’t know about.”

If
you really can’t qualify for Chapter 7, a Chapter 13 bankruptcy may work, which
is a court-supervised repayment plan. And if that’s not right for you (it
requires sufficient income, but perhaps your wife earns enough to make it
feasible), don’t panic. Assign any of your available cash flow to finance
property that you want to keep, such as a home and car. The worst a credit card
issuer or collector can do if you don’t pay is sue you for damages, and if you
lose you’ll owe a monitory judgment or, if your wife works, she may have her
wages garnished. Social Security Disability Income is protected from creditors,
however.

Please
try to not worry about money and credit. Do your best to adopt a matter-of-fact
attitude. If you have the means to pay, do. You can even send your creditors a
few dollars whenever you have extra as a good faith measure. But if you can’t,
let it go. Live the very best way possible. I wish you peace, health and
happiness.


See related: 7 times when bankruptcy can make sense, 14 key factors when considering bankruptcy





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