This is my column from the July 18, 2007 edition of the Greenhorn Valley View (registration required):
To be bankrupt means to not have the ability to repay what is owed. You can work yourself into this condition slowly, or it can be thrust upon you quickly.
Business debts and medical debts can rack up quickly and leave your head spinning, without the faintest idea of a clue about how to repay. In these situations, it might be best to forget the whole thing ever happened, and seek legal discharge from your debts.
Or you could simply be living outside your means, spending slightly more each month than you bring in. Over time, this little bit of extra spending can result in maxed out credit cards, massive home equity debt, and payday loans, among other things. Obviously, you are more at fault in this case than with the business or medical case. But even then, legal discharge may be the way to go.
But how do you know if bankruptcy is the right course of action? On one hand, you made a promise to your creditors that you would repay them. This is money you have a moral, ethical, and legal obligation to repay. Imagine how your wallet would feel if you loaned someone some money and they ran off without repaying.
On the other hand, the hole you find yourself in may be too big to climb out of. Short of a rich uncle kicking the bucket in Nantucket, there may not be a way out. The debtor’s prisons of yesteryear were filled with people who were effectively serving life sentences – people without any hope of ever being able to repay.
Bankruptcy is the chance to start over again. Erase all your debts (and assets) and start fresh at ground zero. Like anything else, however, there is a cost. Bankruptcy will show up on your credit report for ten years, which means no one will want to lend you money. And if they do, you’ll pay sky high interest rates.
And if you do consider bankruptcy, don’t forget to consider what got you into that mess in the first place. Are there any bad habits you need to consider? Are you going to repeat the behavior that caused the problems, or have you changed something so that this won’t happen again? The worst thing that could happen is to get a fresh start, only start digging yourself a new hole.
In general, I don’t encourage people to consider bankruptcy. But I don’t automatically rule it out, either. By all means, repay every penny that you owe. But if you don’t have any pennies, it might be beneficial to chew the matter over with someone you trust.