Is bankruptcy an option when illness wrecks finances?

Opening Credits with Eric Sandberg

Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for

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Due to illness, I fell behind on my credit card bills. Can I or should I file for bankruptcy?

Even if your income exceeds the median needed to qualify for bankruptcy for your state, as long as you prove that there is not enough money left over after meeting your essential expenses to cover your debts, there is a solid chance you’ll be approved. But meet with a credit counselor first to see if that's the best course of action.
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Dear Opening Credits,
I recently contacted a bankruptcy attorney and was told I did not qualify for Chapter 7. I dropped the ball a little over year ago after almost dying from an acute kidney injury. Even though I managed to survive on Social Security Disability Income and live OK, something happened to me after that with my cognitive skills. I started making poor financial decisions. I can no longer keep up. This last pay period I didn't pay two of my highest balance credit cards. I don't know what to do. Do you have some sort of resource or link to some guide that can help me? I want to salvage what I can. I have multiple myeloma and was given 3-5 years to live in 2007. I'm still alive and will turn 44 this year. I have an awesome wife who helps support me. This has gotten me super depressed. Any tips or suggestions would be greatly appreciated.

Dear Al,
With your medical condition it may be very difficult to prioritize right now, so let me assure you that financial problems should take a back seat to health problems.

Why you were told you couldn’t discharge your debts is confusing, so I reached out to Leon Bayer, a Los Angeles-based bankruptcy lawyer, for insight. It may be as simple a reason as going to the wrong attorney. “Bankruptcy laws are unbelievably complex,” he says. “Lawyers without a long career of specializing in bankruptcy law will often lack the analytical training and experience to give a client the correct bankruptcy advice.” It is not unusual for people who do qualify to be told they don't. 

More on bankruptcy in a moment. Here is what I want you to do now.

Start with a detailed budget

With your wife, sit down and lay out your entire financial situation. For materials, all you’ll need is a piece of paper, a pencil and a calculator.

  1. List all of your living expenses (housing, utilities groceries, transportation, medical care, etc.) and what each costs on a monthly basis. Be realistic. This is not the time to undercut food or medication. Add it all up.

  2. Tally what you and your wife bring in from your income sources for the month. Subtract the total of your expenses from it. Where you stand will be clear. If there is a deficit, pick up that pencil and rewrite your financial picture. Reduce truly unimportant expenses (such as cable TV or a landline) until you at least break even. The goal is to make sure you have enough to live comfortably.

  3. In the event there is money left over, consider your creditors. Take the credit card bills out and review the monthly payments for each. If you can truly afford to pay them, fine. Go ahead and start to send them payments again.

  4. Can’t meet the payments? Stop trying. Visit the U.S. Department of Justice to locate a credit counseling agency in your area that provides budget and debt advice as well as bankruptcy counseling. It’s a free service and your counselor will analyze your income, expenses and liabilities in detail. If you missed some reasonable method to increase your cash flow, decrease spending or liquidate assets so you can satisfy your bills and possibly your creditors without sacrificing your health (financial or physical), you’ll find out. If not, you’ll be routed to their bankruptcy education department. Take the recommended bankruptcy course and you’ll soon know if you really are eligible for a Chapter 7. 

During your appointment with the credit counselor, they may bring up a debt management plan. This is a service offered by credit counseling agencies and designed to get people out of debt within three to five years. It's offered to people who can cover their living expenses (which includes a little extra for savings) as well as their minimum debt payments. If the counselor presents it as an option, consider joining, because it can give you the relief you’re seeking. However, don’t be disappointed if it’s not. One of the basic requirements is that you’re working and not receiving government assistance, and it will never be offered to clients who are better off focusing on their necessary expenses. 

Even if your income exceeds the median needed to qualify for bankruptcy for your state, as long as you prove that there is not enough money left over after meeting your essential expenses to cover your debts, there is a solid chance you’ll be approved. So, if bankruptcy seems right, find an experienced law firm that specializes in bankruptcy law in your area.

"Your best source for reliable bankruptcy advice will be with a bar certified bankruptcy specialist,” says Bayer. “Stay away from the bankruptcy mills who advertise with promises that are too good to be true on the TV and radio. There are deep exceptions embedded in the bankruptcy laws that allow many people to qualify that poorly trained lawyers just don't know about.”

If you really can’t qualify for Chapter 7, a Chapter 13 bankruptcy may work, which is a court-supervised repayment plan. And if that’s not right for you (it requires sufficient income, but perhaps your wife earns enough to make it feasible), don’t panic. Assign any of your available cash flow to finance property that you want to keep, such as a home and car. The worst a credit card issuer or collector can do if you don’t pay is sue you for damages, and if you lose you’ll owe a monitory judgment or, if your wife works, she may have her wages garnished. Social Security Disability Income is protected from creditors, however.

Please try to not worry about money and credit. Do your best to adopt a matter-of-fact attitude. If you have the means to pay, do. You can even send your creditors a few dollars whenever you have extra as a good faith measure. But if you can’t, let it go. Live the very best way possible. I wish you peace, health and happiness.

See related: 7 times when bankruptcy can make sense, 14 key factors when considering bankruptcy

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Updated: 12-12-2018