Is bankruptcy my best option?

9 Replies

Hey, this is a throwaway because I feel a bit of shame about my predicament: I’m looking into whether bankruptcy is the best option for me.

I am 34, and had accumulated $110,000 of student loan debt and around $15,000 of debt to the IRS before graduating from college. Over the past few years, I whittled that down to around $87,000 (and $8,000 to the IRS). I haven’t been getting rich, but I’ve been able to pay down my debt while saving for retirement.

Last year, I tore my ACL, had surgery, and ended up accumulating an additional $38,000 of debt. So, as it stands now, my debt consists of:

* $87k student loans

* $8k IRS

* 38k credit cards

I make $54,000 per year.

I was feeling overwhelmed, and met with two bankruptcy attorneys who both suggested I file a chapter 7 bankruptcy. I’ve spoken to about 5 people in my life outside of them, and some feel that it is obvious that I should declare bankruptcy, and some feel it is obvious I should not. I feel incredibly conflicted, and feel like I am in a lose-lose scenario.

My budget:

$3,374 take home

-$1500 minimum payments on various debt (Will likely go up, as credit cards are 0% interest currently.)

-$850 rent

-$130 utilities (gas, electric, internet bill split with others)

-$30 gym

-$276 health insurance

-$50 car insurance

-$350 groceries

-$75 gas

-$15 car registration fund

-$8 oil change fund

-$42 Christmas fund

-$4 YNAB

-$9 Amazon Prime

-$35 misc / unexpected expenses

I have not missed any payments, and I do not need to. I know that I can cut my grocery bill or quit the gym to save more money. I also know that even though I work 10 AM to 8 PM M-F and 9-2 S, I could pick up more work on weekends.

If I were to declare bankruptcy, I would be rid $46,000 of debt (all-non student loan debt, as the attorneys told me my IRS debt is eligible for discharge). The minimum payments I am making towards that 46k is $975 per month, which I could then use to put pay down my student debt faster, and perhaps put some money in a Roth IRA. I also have ~$9,000 cash, which I was advised to spend paying small chunks of debt across the board before declraing bakruptcy if I do that, or retaining as an emergency fund, if I don't.

On the one hand, I do not HAVE to declare bankruptcy. I can meet my obligations. Bankruptcy feels shameful and feels like giving up, and at times feels immoral. I also know it will wreck my credit for a couple years, stay on my report 10 years, and will cause me to check “Yes” on applications asking whether I’ve ever declared bankruptcy the rest of my life. I know it may potentially hurt my ability to rent, and (of particular interest) may hurt my ability to get new jobs.

On the other hand, if I declared bankruptcy I I could take the $975 of minimum it sometimes feels as though not declaring bankruptcy is to suffer through the next couple decades for my sense of cultural shame. While bankruptcy would hurt my credit, I am years and years out from being being in a position to apply for any kind of loan anyhow. I have no ability to save for retirement right now, so choosing not to do this could affect me the rest of my life. It sometimes feels as though bankruptcy was set up for things like this.

As I said, I am severely conflicted. I’m not sleeping well and my mind is spinning its wheels, because the decision feels life-altering in either direction.

So please, if you have any insight that could help me, I am open. Should I declare bankruptcy? If so, why? If not, why not, and what should I do instead? What are the stepsor changes that can lead to financial security and health in the end?

Since most of your debt is student loans which are not dischargeable in bankruptcy I would not do it

I would not file for bankruptcy since a lot of your debt is not eligible. Instead I would look into Dave Ramsey’s plan because he is excellent at getting people out of debt. He has a podcast, books, YouTube videos, and 9 week classes called Financial Peace university. Check out his website or podcast for more details.

I would get all of your student loans on a hardship deferment. Once you start making a lot of progress towards your other debts then work on the student loans. I would also look at adding to your income with a side job since your expenses are low and do not allow for too much cutting back. If you were to be working two jobs you could pay off your credit card and IRS debts faster.

As someone who is dealing with paying off student loan debt myself I feel your pain and it is a tough spot. Definitely try to not accumulate anymore revolving debts (credit cards, etc.). Pick up as much extra time at work as possible and hammer the debt as hard as you can. Might want to talk to the student loan companies to see what your options are in terms of either lowering monthly payments or getting them deferred for a time until you can pay off the other debts and if you are able to decrease those payments put every bit of the money you aren't paying on them on the other debts. Also, cut out everything in your budget that you can and put as much as possible toward the debt.

I have to agree with Amy, Dave Ramey has great info on getting rid of debt and budgeting. Might want to look into his "Financial Peace University" course since it provides a great road map for getting to be debt free. He recommends having 1K in an emergency fund to start and then paying off the smallest loan first then taking what you were paying on that and adding it to paying off the next smallest, etc. creating a snowball. Something you might need to consider is paying off as much of any credit card debt you have with cash reserves since those are likely going to be the highest interest rate. Hope this helps.

If you don't change everything about what you're doing that got you in the position in the first place, then even if you declare bankruptcy you'll just end up right back here again.  There are lots of things you can and should do, don't feel so boxed in.

What people above are saying is correct, Ramsey is excellent, he would tell you you need to attack this like your live depended on it.  You need to get creative!  Get a library card and go check our his books, and Set for Life by Scott Trench.

You need to slash expenses. Cancel the gym and go buy some home workout dvds from goodwill for a buck, wrap some tape around a brick, there's your dumb bell.  Get another job, hell get two more jobs and start dog sitting, that's the easiest $30/day you can make.  Explore even radical moves like get rid of your car or maybe move in with family for a year... you should find a cheaper place to live anyway.  Don't set foot in a movie theater or restaurant for the next year, unless you work there.

For your Christmas fund, pick the people on your giving list that you can give service to instead of stuff.  Chop a cord of wood for your uncle or clean your parents garage for them.

What about a promotion at work or getting a better job?

Don't do it, it isn't worth the downside with the little debt you will be able to get rid of. Just follow the advice from the guys above, put your head down and suck it up for the next handful of years to pay it off. A handful of tough years are infinitely better than not being able to get a loan or a CC for 4 years and then spending the next 6 only being able to get crap loans and low balance CCs.

@Tyler Mullen got it right. I would not go to a movie, restaurant, or spend one bit if it was not 100% absolutely neccesary. A gym membership along with an Amazon prime membership seem kinda wasteful right now. It is definitely the big things like a car, rent, going out to eat, but it is also the little stuff that adds up. You know that Amazon is always advertising books, and a million other items to buy. We as Americans can not get away from the pull of all the advertising. We will give in and spend. Take away all the temptation.

I might put a tiny amount into Roth right now, but the big problem is the expenses. By the time those are gone, you will be leading such a frugal life, that you can put more away for retirement. Right now, those bills are costing a bunch. 

Mr Money Mustache. Look him up.

Some thoughts. Agree that no bankruptcy since dischargeable debt is low compared with student loans. Ask for forbearance  ie modified lower repayment.

Get rid of Gym and Amazon prime membership. Amazon prime means impulse shopping and/or wasting time streaming movies. 

Any way to get rid of car? Move to a place closer to work or public transport?

Any possibility of getting roommate?

You have health insurance, so why the 38 k additional debt due to ACL surgery?

Originally posted by @Vinay H. :

You have health insurance, so why the 38 k additional debt due to ACL surgery?

 Not to speak for @Reed, but I'd guess it's a combination of high deductible for insurance, the percentage of his co-pay once the deductible was met, and living expenses (if he has a job requires the use of his legs and that did not pay him for an extended absence.) 

Reed, I would not file for bankruptcy.  Student Loans can be petitioned for payment adjustment, based on your income and other bills.  The IRS will put you on an affordable payment plan.  The credit card debt?  It's a mountain, to be sure, but if you cut more from your budget, get a roommate, and downwardly adjust your student loan and IRS payments, you can slog through the CC debt in a couple of years.  The bankruptcy will affect your life for a lot longer.

@Reed Jeffries ,

Reed, it may feel hopeless and like you are out of options.  You aren't, that's just how it feels right now.  You will make it through this and emerge the other side stronger, better and more resilient.

Stop what you are doing and listen to this if you haven't yet already. 

BiggerPockets Money Podcast 22: How to Pay Off 6-Figure Student Loans While Pursuing Financial Independence with Travis Hornsby

Email Travis, find his email in the show notes.

Good luck man.