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Beg mom for help? Or file for bankruptcy?

Erica Sandberg

December 5, 2013

QDear Erica,

I have three credit cards with combined debts of nearly $10,000. This was left to me after a divorce and not from shopping. I am just barely able to meet my minimums, and even that is a stretch. My job is not secure — there have been some layoffs lately and I'm scared I'm next. I never thought I would say this, but I'm contemplating bankruptcy. I don't want to do it, but I don't want to throw good money away when I may need it later. I'm 26 years old. I have a master's degree, and I was not raised this way. I was doing OK, but now I feel like a failure. I don't want to tell my mother as she would be disgusted. She would insist on paying my bills off. I don't want that. Besides, she would hold my failure over my head. I know you don't know me personally, Erica, but do you think I should swallow my pride and ask my mom for help, start over with bankruptcy or just keep trying and hope things get better? Thank you in advance. — Margaret

ADear Margaret,

Stop worrying about what everyone else thinks of you and focus on what is best for you. All of your financial decisions must be based on practicality and probability.

If you really believe that your job is in danger of drying up and that you won't be able to secure another one that provides with you with at least as much cash flow as you have now, discharging that debt in bankruptcy might make sense. Yet, before you knock on a lawyer's door, take stock of what you own. Maybe you have some things of value that you can sell. Then you can send the proceeds to your creditors. You might be able to reduce the balance to such a degree that you can meet the smaller payments, even if your income is reduced. Don't go too crazy and start selling off necessities, though. I just want you to see your situation clearly, and sometimes that strategy can relieve pressure.Ask Erica

In the event that you have nothing to part with, you do have to consider your options. Here they are, in no particular order:

  1. Chapter 7 bankruptcy: If you meet your state's income criteria, you can discharge what you owe in bankruptcy court. The upside is, of course, that you won't have to struggle any more, and can use that money you had been sending to your creditors into a savings account instead. The downsides include credit damage (since you've been paying on time, your credit may actually be quite good) for 10 years, and a feeling of what you've already described: failure. Not everyone experiences such emotions, but some do. I admire you for making a supreme effort, but you must be rational. If you can't pay now or in the future, so be it. You can take pride in knowing you did your best.
  2. Chapter 13 bankruptcy: This form of bankruptcy allows you to pay your creditors through the courts, in as many as five years. During that time, interest and fees are suspended, and after it's over, whatever remains will be discharged. Sound good? It can be. The disadvantages include trustee fees and a bankruptcy notation on your credit report for seven years. And if you start to earn more, you may have to pay more. If you lose your job, you may be able to convert it to a Chapter 7.
  3. Debt repayment plan: Nonprofit credit counseling agencies offer debt payment programs to people who are having trouble covering their bills and obligations. As with Chapter 13 bankruptcy, you'll need an income to meet the payments. You'll send those payments to the agency, and they'll distribute them to your creditors. Credit counselors can often negotiate agreements with your creditors to reduce finance charges, so you might end up paying less over time. If it works, you'll avoid bankruptcy. When you're done, you'll walk away with a sense of accomplishment at having paid every dime.
  4. Hardship arrangement. If you think your job will stabilize or that you can find a different position that's even better (network and interview now!), talk to your creditors to explain what's going on. You may want to ask for some time to pull yourself together and possibly suspend payments (without being reported as late) for a few months. You've been sending your payments steadily, and that holds a lot of weight with a lender. Call your issuer and ask if it offers a hardship program. These programs are generally not advertised, and you may have to speak with several representatives before you find one who can help you. But they can offer temporary relief for those who expect their financial situations to improve.

Notice that I didn't include asking your mother for assistance. That's because this really is none of her business. It sounds as though she'd be as quick to judge and condemn as she would be to rescue you. Therefore, unless you're absolutely comfortable asking her for a lifeline, I see no reason to involve her.

Got a question for Erica? Send her an email.