Losing your job doesn't mean you have to file for bankruptcy

Tax liens and student loan debts won't go away anyway

By Sally Herigstad

To Her Credit

Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets. Ask Sally a question, or read her previous answers in the To Her Credit archive

Dear To Her Credit,
As of today, my husband and I have only one income. I've been laid off. We live in California and do not own any real estate, but we have close to $60,000 in debts. Most of it is my student loans and credit card debt. We're also behind on our income taxes, which we filed jointly. If I file for bankruptcy, do you think it will destroy my husband's credit? -- Caitlin

Dear Caitlin,
Whoa -- slow down there! You got laid off today, and you're thinking about filing for bankruptcy?  Let's not get into too big a hurry.

Losing a job is traumatic. It's amazing how much of our lives are wrapped up in our job  -- status, evidence of achievement, money, purpose, perhaps even our closest circle of friends. All that feels lost when you carry a box and a couple of potted plants down the elevator for the last time. Give yourself time to recover before you make any drastic decisions.

I don't think you'll find filing for bankruptcy over $60,000 in debt is a good idea when you take everything into consideration. There are times when bankruptcy is the only solution -- for instance, when someone has a huge, one-time debt from medical expenses or a failed business. However, with two people in their earning years, you can and should pay your creditors. Bankruptcy is expensive, time consuming and can be emotionally devastating. Further, it won't get rid of student loans or most back taxes. By lowering your credit score, bankruptcy might even it harder for you to get a job.

As far as your husband's credit goes, you filing for bankruptcy does not directly affect him. However, if both of you are on the credit card accounts and only one of you files for bankruptcy, the banks will turn around and collect from him. You'll be right back where you started! Even if he's not on the card, they can try to collect from him in a [%Link?type=glossary&id=340&text="community property"%] state such as California, or they can argue he benefited from the use of the accounts.

Instead of thinking about bankruptcy, take these steps to get back on track:

1. Cut yourself some slack for a day or so. Some people go for a good run when something traumatic happens. (I'm not one of those.) Others talk to friends, dawdle on Facebook or make chocolate chip cookies. (I'm more one of those.)
2. Check your state unemployment office to find out how much your unemployment benefits will be.
3. Find out where you stand. Make a list of all your debts, including interest rates and minimum payments. Make a baseline budget using your current income and your family's monthly no-frills expenses.
4. Start looking for ways to make income. The people who bounce back quickly from losing a job get back into the marketplace immediately. Create a knockout resume, with help if you need it. Network by phone and online using LinkedIn and Facebook. Make sure everyone knows you are looking for work. Check online job sites every day. Or consider starting your own business. You can even sell things, such as a motorcycle or some collectibles, to help you keep up with bills while you look for work.
5. Look for places to cut expenses. I prefer big savings, such as finding a better deal on insurance or canceling unused memberships. Some gyms, for example, will let you cancel or suspend your membership when you are unemployed. Recheck that baseline budget and see how close you are to balancing it now.
6. See if you qualify for hardship programs on your debts. Banks, and even the IRS, often suspend or reduce payments when debtors are unemployed. In the case of credit card debt, some issuers are willing to delay repayment via credit card forbearance programs.

Even in a down economy, people find jobs, start businesses and even prosper. In fact, many people find losing a job is a step to finding a job or career they like better! Let's hope that is the case for you. Good luck!

See related: Is bankruptcy right for you? Our 7-point checklist, Explore all options before declaring bankruptcy, 14 key factors when considering bankruptcy, Credit card forbearance programs postpone repayment obligations

Gary Foreman, "New Frugal You"

Sally Herigstad, "To Her Credit"

Cathleen McCarthy, "Cashing In"

Jane McNamara, "Let's Talk Credit"

Elaine Pofeldt, "Your Business Credit"

Erica Sandberg, "Opening Credits"

Published: July 9, 2010

	Three most recent To Her Credit stories: Will card debt scare off student loan lenders? – With high card debt, no job and a desire to return to school, will qualifying for a student loan be insurmountable? ... Student loan co-signer on the hook for delinquency – A wife co-signed her husband's student loans, which he defaulted on when he lost his job. Should she pay off the balance or not? ... Pay off debt vs. settle it: Which is better for your credit score? – With $4,000 in card debt and five months behind on the bill, she wonders if settling the bill or paying it off is better for her credit score ...

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