As a Baltimore Bankruptcy Attorney, I get asked regularly how much debt is needed to file bankruptcy.  It is a question without an answer, unfortunately.  You see, it’s not about the amount of debt, it’s about your ability to deal with that debt and the ramifications to you of not seeking protection.  In other words, that number is going to be different for everyone.  Even two people with the exact same income and the exact same amount of debt may have a different number.  What many people fail to understand, even people who are involved in bankruptcies professionally, is that it’s not about the amount of debt, it’s about the need for relief.  It’s about having the very fundamental necessities of life threatened by your debt.

Bankruptcy isn’t a dirty word!

Before I go much further, let me get out my soap box for a moment.  Too many people in this country believe that everyone who filed for bankruptcy are deadbeats or brought their situations on themselves.  For the vast majority, however, they did what everyone else was doing, financing parts of their lifestyle and were then hit by an unforeseen event that threatened their ability to provide the essentials for their families.  For a large minority that event may be a serious illness or permanent disability.

It could be recession and job loss and the inability to find a job that restores you to a wage necessary to meet the obligations you’d assumed when times were better and wages were higher.  Are some of these emergency situations avoidable.  Sure.  Some are.  I cast no stones, however.  There are things you can do to insulate yourself from calamity, insurance products to assist if you are seriously ill and cannot work, or disability policies that can restore part of your wage if you are permanently or seriously injured for a long period of time.  These things cost money, however and for many people are not economically justifiable.

Can Debt be avoided?

Should more people save money and rely on savings instead of credit.  Absolutely.  Yet our entire culture revolves around consumption.  We are marketed to and pressured from all sides to spend spend spend.

The President once said it was our patriotic duty to spend to restore the economy.  Putting aside the debate on macro-economic policy decisions, I would just state that I disagree.  All these pressures discourage savings, encourage consumption, and put us all at greater risk of needing my services one day.

So, back to the topic at hand.  What are some of the warning signs that you are getting close to needing my services?  And how bad are each of them.  We’ll start from the least alarming and move up from there.

6.  No Emergency Fund

Many debt experts recommend having enough money in the bank to pay your bills for at least 3 months in the event of job loss or illness.  This gives you time to hopefully regain employment and doesn’t leave you dependent on financing your necessities while you are out of work.  If you do not have an emergency fund, start one now.  This may require going on a restrictive budget.  If you don’t have a budget, read this article on creating a family spending plan.

5.  Housing Costs as Percentage of Income is More than 25%

The percentage of your income that you spend on sheltering yourself and your family is no sure measure that you’re in danger of needing to hire a bankruptcy attorney, but as one of the largest and most immobile line items on your family budget, housing costs do give us some ideas as to the riskiness of your living situation.  During the housing bubble many people found themselves in homes who’s mortgage payments were 30-45% of their salaries.  Many of these homes are now foreclosed.  If you are in this situation with a mortgage or if you rent, look for ways to reduce the monthly expense.  Refi options are very popular right now, and interest rates are at historic lows.  If you rent, look to relocate or renegotiate your rent.

4.  Your Credit Card Balances Continue to Rise

If you’re not in an emergency situation and yet your credit card balances continue to rise month after month, then you’re slipping into the danger zone.  This may mean that you need to reassess your budget priorities, review your spending habits, check for illicit use, or more aggressively pay down your outstanding debts.  It is understandable that in a brief period of unemployment or after a major expense arises unexpectedly, that you may have to incur some additional debt, especially if you don’t have an emergency fund.  When these balances are rising absent these circumstances, it is a sign that your spending is not controlled.

3.  You Are Forced to Use Credit Cards to Make Up a Portion of Your Budget.

So, the first of the month rolls around and you’ve paid your rent, your utilities, and all of your credit card bills.  The problem is that you’ve got $600 left in expenses budgeted for the month and $400 in cash.  No problem, right?  $200 on the credit card.  Wrong.  This is a serious warning sign.  This means that the payments you’re making on your credit card are eating into your budget more than they should.  This calls for either aggressively reducing your credit card balances and/or reducing your monthly expenses.  Many people are actually in this very dangerous situation and do not even realize it.  They think that it’s no problem, because they’re paying $250 to a credit card and only using it for $200.  The problem is that they may be paying more in interest than the difference between the two.

2.  You Are Regularly Forced to Pay One Credit Card with Another (i.e., Balance Transfers)

This is serious.  This means that you are probably Insolvent.  Meaning, you cannot pay your bills as they become due.  As some of my clients put it, you’re robbing Peter to pay Paul.  Your overall debt load at this point is starting to increase dramatically.  Maybe you can resolve this with serious budgetary constraints, but if this situation comes upon you unawares, then you may be locked into long term mortgages or leases that could inhibit the necessary downsizing, cost reductions you need to make.  This is a classic sign that bankruptcy may be the best option for you.

1.  You Regularly Make Payments Late or Not At All

This is where most of my clients are.  Some come to me recognizing that they are in stages 4, 3, or 2 and proactively take charge of this situation, but when you’re in this final stage, it requires some hard truths.  Hardest of those is that Bankruptcy may be the BEST option for you at this time.  We will happily review your situation and see if bankruptcy can be avoided, but you need to be ready to accept that avoiding bankruptcy may be more difficult and costly than actually filing bankruptcy.