I have enough equity in my home to pay off my creditors. Should I file bankruptcy instead?


Honestly, if you have the means to pay your creditors off, then you should do so.  Now if that means filing a chapter 13 bankruptcy and proposing a 100% return to your creditors, then yes, you may want to file bankruptcy.  In that kind of 100% plan, you freeze the interest rate at 2% and have the ability to pay your creditors off in an orderly fashion.  Otherwise, leave bankruptcy for people who have no other option financially.

I have had a few phone calls from a gentleman who has $6,000 of credit card debt.  He has about $90,000 of equity in his home.  He wants to file bankruptcy to get out of those credit card payments.  I explained the costs of a chapter 7 or a chapter 13, warned him about the equity in his home, and then recommended that he try taking out a HELOC (home equity line of credit) on his home for $6,000 to pay them off in full.  About a week later he called back and wanted to make sure that he couldn’t go bankrupt instead.  I explained, again, that he had enough equity to pay off that rather small amount of debt.  should i file bankruptcy

I can only imagine what Dave Ramsey would have said to this gentleman if he had called in to Dave’s show.  This potential client didn’t even need a “debt snowball” plan.

Basically, bankruptcy gives a “fresh start” to those who really need it.  The federal court’s bankruptcy website states that:

A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial “fresh start” from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:

[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.

Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.