Most personal finance blogs advise against bankruptcy. And this is good advice – doing all that you can to avoid facing the circumstances that would make bankruptcy necessary is always the first, best course. But are there times when bankruptcy is the right choice? I think it might be better to say that there are times when bankruptcy is the only choice.
How can you tell if you are in that situation, where bankruptcy is absolutely the right choice? Every situation is different, and you really need to consider all of your options, and even speak with a bankruptcy attorney before preceding. But here are five situations where bankruptcy could absolutely be the right course of action.
When You Have Large, Uncovered Medical Costs
This one is hardly a revelation. Large uncovered medical costs are one of the primary reasons for filing for bankruptcy. This can happen even if you have health insurance, since a serious illness could force you to seek treatment and procedures that are either uncovered, or out of your network. With the astronomical cost of healthcare today, this can result in tens of thousands, or hundreds of thousands of dollars in uncovered medical expenses.
Very few people are in a position to cover expenses of that magnitude, particularly during the recovery phase from a series injury or illness. Bankruptcy may be the only way that you will be able to wipe the slate clean, and get the fresh start that you need to move forward with your life.
It remains to be seen what effect Obamacare will have on the mountains of uncovered medical expenses that people were facing under the previous system. And even if it does help, if your medical expenses came about before the new law came into effect, you’ll still be on the hook and you may need to consider bankruptcy.
When You’re Dealing With Prolonged Unemployment
There are no small number of people who have experienced periods of unemployment lasting more than one year, at least since the financial meltdown began in 2007. You should be able to survive unemployment that lasts just a few months, but if it drags on – and your unemployment benefits and liquid cash run out – debt may be the only way to survive, particularly if you have a family to support.
If you have a significant amount of debt by the time you are re-employed, the carrying cost of the debt could be greater than the ability of your new income to carry – let alone to pay it off. This will be especially true if you take a significant pay cut since your last job in order to regain employment, a situation that is not at all uncommon for people who have been unemployed for more than a year.
The Loss of Your Business
This is similar to a person who has been unemployed for very long period of time, but the loss of a business has two additional complications:
- It is often close to impossible for a formerly self-employed person to re-enter the workforce for a traditional job, and
- There are often lingering business debts in the aftermath of a failed business, that the former entrepreneur lacks the ability to cover.
Closing out a failed business can be a certified nightmare. For example, business debts can include not only loans taken as part of the business, but it often also includes unfulfilled contracts, open tax liabilities, and unpaid accounts payable obligations.
The former business owner may be faced with the unpleasant choice between a lifetime of indebtedness – or bankruptcy. Generally speaking, it’s best to declare bankruptcy, close out the obligations, and move on with your life. The sooner that you are able to become productive after a failed business, the better that you will be able to maintain and manage your post-business obligations.
Dealing With Serious Health Problems
We already discussed the crushing burden that you can be left with when it comes to medical bills. But another health-related issue is the development of chronic illness, injury, or incapacitation that either reduces or eliminates your ability to earn a living.
A permanent – or substantially permanent – reduction in your income earning ability makes a strong case for bankruptcy. It will be tough enough for you to pay your obligations going forward, let alone to cover those from your previous life.
When You Are Caring For Dependents
If you have dependents in your care – either young children or elderly parents – your first obligation is to take care of them. If you have large debts that will significantly compromise your ability to fulfill that obligation, bankruptcy has to be a consideration.
This isn’t to say that anyone who has dependents should have a special pass to file bankruptcy anytime they get in the weeds with their debts. But if you are having difficulty providing the basics for your dependents – food, shelter, healthcare, etc. – you will have to consider terminating certain debt obligations through bankruptcy.
One scenario where this can become especially necessary is when you find yourself suddenly thrust in the role of primary caregiver for an elderly parent. While this typically comes with higher financial obligations, the flipside is that it also usually requires a substantial investment of your time in their care. This can impair your ability to earn a living at a time when expenses are rising significantly. You may find yourself suddenly unable to service the obligations of your previous life, and bankruptcy may become totally necessary to help you deal with stresses that you are facing.
Filing bankruptcy should never be taken lightly, since there are substantial negatives that come with it. But if you are facing an impossible financial future, or you have people obligations that transcend financial obligations, you’ll have to give bankruptcy serious consideration.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.