Clark Howard

Ask Clark: When should I declare bankruptcy?

If you look around, you can see plenty of examples of powerful and “wealthy” people and corporations using bankruptcy as a financial strategy and shield from creditors. In some cases, companies and individuals have been forgiven millions and even billions of dollars in debt by declaring Chapter 7 or Chapter 11 bankruptcy.

If you've found yourself deep in debt, the idea of making those financial obligations seemingly vanish might be tempting — but in reality, bankruptcy should only be considered a last resort.

Bankruptcy: When you can’t work your way out of debt

There are many confusing issues surround bankruptcy — chiefly, what are the ramifications and when, exactly, should a person declare bankruptcy? Money expert Clark Howard has some definitive answers on the subject.

“Often I find that people file for bankruptcy when they’ve had one too many calls from the debt collector,” Clark says. “But that’s not the reason to file.”

Clark says a key factor in deciding whether to file for bankruptcy protection is determining your ability to handle the debt vs. the pressures associated with it.

“The reason you file bankruptcy is because you’re at a point where you’re never going to be able to work your way out of the debts you have,” he says. “And that’ll happen sometimes, but most of the times, you’ll be in a position where you’ll be able to handle the debt as long as you come up with a plan.”

Bankruptcy has some advantages. Namely, it stops creditors from nagging you constantly about what you owe them. But there are some real disadvantages as well. In many cases, you may be forced to sell some sentimental assets, like your home. And bankruptcy can be absolutely devastating to your credit score.

That’s why Clark has devised a three-step plan that you should follow before you think about the B word.

3 steps to follow before you decide to declare bankruptcy

  1. Go see a certified credit counselor who is an affiliate with the National Foundation for Credit Counseling. You can find someone close to you by searching
  2. With the counselor, go over all your outstanding debts and income and see if together you can come up with a budget that works for you. If nothing can be done in that regard, there's still another option…
  3. See if your credit counselor can contact your creditors and negotiate a payment plan. You'd be surprised how many companies will settle for pennies on the dollar just to get something for their troubles. If you are able to work out a payment plan, you can expect it to take about three or four years to get out of debt — but your credit and buying power will be intact.

But what if you find that bankruptcy is the only option?

“Only if you find there’s no way out after you meet with a debt counselor, a legit one, that’s the point where you might consider filing for bankruptcy,” Clark says. “But it is a last choice, not a first.”

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