Need opinions on whether to file

[jb300]

I had a friend contact me about filing BK. Bascially consumer debt. They want to keep their car which they are still paying on. We are talking about
15K in debt.

Only one of them wants to file. They are married together they make I am going to guess at least 3K a month.

Is this enough debt to file BK over? The more I think about this I wonder if it is just time to tighten up the belts, cut back on eating out and going places, save some money and debt settle rather than filing.

What is the general criteria for what is too little to file on?

Thanks everyone. You have always steered me right and I trust you again will help me out.

[catleg]

I'm thinking, if they make 3k a month, and that credit card rate jacks them to 30% APR (2.5% a month, or $375) and requires 4% of balance ($600) as a minimum monthly payment, it could very easily push someone over the edge.
If your payments are mostly going towards interest and belt-tightening isn't going to fix it within, say, 12 months, I think BK is reasonable.

They might be better off if the lender is willing to take 0% APR and a balance liquidation over 60 months, but that often requires defaulting on the card, which alternatively takes you to BK.

[momofthree]

I can't imagine wasting a bankruptcy on a measly 15K of credit card debt. What would they do if they encountered a medical problem, lawsuit, job loss or some other unforeseen circumstance in the next couple of years and they wasted their bk on this $15k of debt?

I can tell you that 3 years ago, we were living the comfortable life, completely debt free aside from our mortgage. I was a stay-at-home mom to 2 kids and we were making good money. We then had an unplanned pregnancy, a child diagnosed with autism (treatments not covered by insurance), and my husband received a substantial pay cut. If we had already played our bankruptcy card, we'd also be facing wage garnishments right now, we'd lose our house, and we'd have to choose between medical care for our special needs child, or food for the family--not a choice anyone wants to make....Thankfully, we have bk available to us, we'll get to keep our home (that we've lived in for 9 years), and still provide for all our children's needs.

Anyway, moral of the story, if they have another alternative for bankruptcy then that is their best bet. At only $15k of debt, they can probably come to a very reasonable settlement agreement that would be workable, and that would look better on their credit than a bankruptcy.

[HHM]

momofthree...I understand where you are coming from, but I agree with catleg. The decision to file BK is dependent on the persons individual circumstances, you cannot objectively say that $15,000 is too small a debt to file BK over and you certainly cannot play the "what if" game. A person needs to make decisions based on the here and now and what is known.

For a person grossing $36,000 per year, a $15,000 debt load is a large amount of debt. That is a 41.6% debt to income ratio (which is high). At 40% D-I, I start recommending bankruptcy. Also, that is simply not enough income to "tighten-up" and be able to pay this off in a reasonable amount of time. Where could they tighten up? You didn't mention what state they are in or the household, but in just about every state, $36,000 is well below median for a household of two. What that means is, in a practical sense, they don't have money left over after paying living expenses to service a debt that large. On that income, they need to be saving money, not servicing debt. Essentially, they are borrowing from their retirement (which I am guessing is non-existent right now) the longer they are in debt. Assuming a 2.5% minimum payment, their minimum payment is $375 per month, 12.5% of their monthly income. They need to be saving that money, not paying debt.

Believe it or not, they are prime BK candidates.

Also, as a side note, debt settlement does NOT look better on your credit report than bankruptcy. Also, if this family is struggling to make minimum payments, there does not appear to be any resources to save up to settle the debt anyway.

[jb300]

They are in Iowa and there are 3 of them all the time and a 4th on visitation weekends. This is what I needed to know because I don't know how to do all the math to figure this stuff out. Thanks.

[StartingOver08]

Have they tried the cc hardship program yet? Your friend can negotiate with the cc's hardship dept for a reduced interest rate: zero percent is common. I have also seen 2% and 4% (this is what I paid back in 2007 on the program before I filed BK at the end of 2008). The advantage of the hardship program is your monthly payment is reduced signifcantly and the amount you do pay goes toward the principal balance. The disadvantage is the account is closed and the cc co wants a direct draft from a bank account. The best way to do this is to have an account set up at a different bank from your regular savings/checking account and only put in the necessary funds for the draft + a small cushion. The program works when you have small debt, like your friend. (In my case my debt was $1M and I had a reduction of 85% of my income so it was not viable for me.)

The only way to determine if the plan will work for her is for your friend to first figure out where her money is going and to rework her budget.

I agree that $15k is an extremely small amount over which to file BK. It makes much more sense to streamline the budget, cut out fat (eating out, cable/satalite, etc) and devote whatever resources they have to getting out of debt. Filing BK over $15k is like hitting a fly with a sledgehammer - the cure will cause more damage than it is worth IMO.

HHM has a point about the DTI - but is this their actual current income? You had said "guess" so I "assumed" you did not have the figures. Before they do anything they need to have actual figures.

[HHM]

Ok, so they are a household of 4. The median income in Iowa for that household is $72,961 (really, I didn't think it would be that high either).
To put this in a little perspective, the IRS allowed expenses (the 5 major categories) add up to $3,565 for a family of 4 in Iowa
Food, Clothing $1370
Medical $240
Housing $1,100 (I am averaging the 3 most expensive counties since I am assuming they probably live in one of those)
Vehicle operating costs $366 (assuming 2 vehicles)
Vehicle ownership costs $489 (assuming 1 vehicle).

If this family really only earns about $3,000 (heck, even if they earned $4,000) per month, they need to file BK, or they will just be buried in debt for the rest of their lives, the only hope for their kids to go to college is scholarships or to put themselves in debt with student loans, and parents only retirement will be social security. My guess is, that is not what they want.

The problem with any sort of long term payment option, be it a 60 month hardship program or Consumer Credit Counseling is that this family is not going to stop using credit. Realistically, one time expenses are going to pop up, they probably don't have savings, so what is the point of paying on this debt in 5 years. The odds are stacked against them. At least based on the numbers provided so far, they need to file BK yesterday, and start saving 10% of their gross monthly income every month.