When medical problems hit, bankruptcy can make sense

Created for catastrophic situations, bankruptcy is still last resort

To Her Credit columnist Sally Herigstad
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 wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

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Question for the CreditCards.com expert

Dear To Her Credit,
I've had a very difficult five years. My mom was diagnosed with ovarian cancer in 2004, my sister and I both had breast cancer treatment in 2005 and 2006, my father died in 2007, and my sister died in 2008. I've taken a lot of time off work, and am way behind financially.

I took out a second mortgage on my house in 2006 to keep up. I had almost perfect credit in January 2008 (740+). But now, in January 2009, my credit score is probably 500 or lower! I'm behind in my mortgage. I owe $60,000 in credit card debt, $6,000 in medical bills, and $15,000 in back taxes.

I've been paying my credit cards every month (sometimes late, but always at least the minimum) and my IRS debt. However, the finance charges on my cards are over $1,000 per month, and then there are the penalties and interest on my taxes.

I'm working more now, and my husband is making more money at his job. Between us, we make $80,000 per year, which sounds good. But our expenses are over $100,000 with two mortgages, credit cards, car payments, gas, business operating costs and repaying past debt.

Should I declare bankruptcy or go for a loan consolidation? (I once tried going to a credit counselor, but since I am a freelance worker, I don't have a regular income. I've made up to $10,000 per month and as little as $200 per month.) Or should I just contact my credit card companies and tell them that I may have to declare bankruptcy, and see if they will suspend my finance charges until I get the balance paid? I don't know where to turn, so I hope you can help me. Thank you. -- Mitzi

Answer for the CreditCards.com expert

Dear Mitzi,
I get letters regularly from people who don't know how they got into debt or who got there by making major financial mistakes. Your case is different. You and your husband have been hit with incredible financial, physical and emotional hardships. I can only imagine what you've been through.

Bankruptcy laws were created for catastrophic situations such as yours. I would not fault you for filing for bankruptcy if that's what you decide. However, I see a couple of reasons you should still think of bankruptcy as a very last resort:

  • You and your husband have a good income. That means you can pay off your debt -- it will just take time. And if you file for bankruptcy, a 2005 rewrite of bankruptcy laws applies a "means test" before people can file for Chapter 7 bankruptcy and have debts discharged. Those with income higher than the mean in your region may be forced into Chapter 13 bankruptcy rules, under which you repay debts under a three- to five-year, court supervised plan.
  • Your excellent credit score before 2008 indicates that you are used to paying your bills on time and being in good standing with your creditors. Many people, especially those who have always tried to be responsible financially, find bankruptcy to be emotionally devastating. That's the last thing you need now.

Here's what I recommend instead:

  • Sell your cars. Pay off your car loans and buy or borrow a couple of cheap cars. Or get along with only one car. Car loans are budget killers!
  • Request an abatement of IRS penalties. Write a letter to the IRS explaining your illness and the deaths in your family. Include dates and show how they correspond to the tax periods in question. Point out your good standing with the IRS before these events. You must specifically request an "abatement" of penalties. Remember, when the penalties are removed, your interest expense will go down dramatically, too.
  • Negotiate with your credit card companies to get better rates, no annual fees, and even settlements. You can do this yourself -- there's no need to pay exorbitant fees to a debt settlement company. You can find books on debt settlement or negotiation at your library.
  • Go back to financial counseling. A good counselor can help you make a plan even with a variable budget like yours. It will take time to pay off your debts, but a counselor can look at your whole picture and help you make a plan to pay them off faster

Whatever you decide, I wish you and your husband the best. Take care.

See related: Take control of debt, avoid bankruptcy, Bankruptcy filings up 33 percent in 2008, 5 tips for those considering bankruptcyLegacy of the 2005 bankruptcy reform unclear

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Updated: 11-16-2018