Q: I have been unemployed for about a year and still have not gotten a job. I was paying my credit cards until a couple of months ago. My unemployment benefits stopped and my savings are now gone.
I have spoken with my credit card companies and most of them understand my situation. If I could make a partial payment, I did. But I received a collection agency notice yesterday on one of my accounts even though I made some payments to them. Should I file for Chapter 7? The total amount I owe is about $50,000.
A: We’re sorry you’ve been unemployed so long. The typical length of unemployment right now is about nine months, and you’ve gone well beyond that. It’s no wonder that your resources have evaporated.
This could be the right time to start over and try to eliminate your prior debts through a bankruptcy. But before you make that decision, you should know that filing for bankruptcy has its own issues. Your credit history will suffer as a result of your filing and your credit score will drop further than it has so far. Also, the bankruptcy will remain on your credit history for at least the next seven years.
While these issues may not matter now while you are suffering through your current financial situation, you may want a higher credit score or a better credit history once you find a job. If you’ve filed for bankruptcy, it will be some time before you’re able to restore your credit history to its former glory. According to FICO, it could take seven years for your credit score to get back to where it was before you went into bankruptcy.
The problem for you is the serious amount of credit card debt that you’re carrying. We don’t know what your income was, or what you could hope to earn if you get another job, but non-profit credit counselors have a rule of thumb they use to decide whether you should be in a debt management program: If the amount of debt (not including a mortgage) is more than 100 percent of your annual income, you won’t be able to pay it off within the four years allotted to most debt management programs.
In other words, if you were earning $75,000 per year and racked up $50,000 in debt, but expected to earn at least $75,000 at your next job, you could find a way to pay off that debt once you are gainfully employed. But if you only earned $35,000 and racked up $50,000 in debt, you would be ineligible for a debt management program and would be advised to consider bankruptcy.
If you have some funds, you could simply stop paying and wait for the collection companies to make you an offer to pay off some of the debt and charge off the rest. That’s especially true if a good portion of the balance is now fees and charges the credit card companies have added to bills you incurred some time ago.
Tactically, you will need to decide whether filing for bankruptcy helps you more than it hurts you. You should sit down with a bankruptcy attorney to explore your options and understand the consequences of filing. While bankruptcy might be the right way to go for one person, it’s definitely not right for others.
One additional thought: if you are hoping to be employed in a profession that requires a credit check (such as banking or finance), filing for bankruptcy might make it that much harder for you to get a good job.
Some states don’t permit employers from using an employee’s credit history against them, but if they are able to get that information, they could still consider it as one of the many factors in denying you employment – whether they can do that legally or not.