Is bankruptcy a bad idea?

Letter to “Ask Leon”

Dear Leon:
My wife and I are in financial trouble. We have a yearly income of $63,000, own a home, have some home equity, and a home equity line of credit. We also have $45,000.00 in credit card debt. For us, bankruptcy has always been the absolute unthinkable. We are current on our bills, but it is getting harder by the month.
Signed, Sean

Leon Says…

Dear Sean:
Bankruptcy is an unthinkable word for most people, that is, until they truly need it. Chances are that you have frequently dipped into your home equity line just to meet the current monthly credit card payments, (the old syndrome of “borrowing from Peter to pay Paul”). If so, that is always a warning sign of severe financial distress. Concerning your home if you file bankruptcy, in California, most married people are entitled to protect $75,000 of equity in their home if they file bankruptcy; if they are elderly or disabled, that amount jumps up to $125,000, (these amounts vary from state to state). Home equity is the difference between what your home is currently worth, and what you now owe on all of your mortgage loans, (including home equity loans). As you can probably guess, home mortgage loans don’t disappear in a bankruptcy, but credit cards usually do. Let’s assume the equity in your home doesn’t exceed $75,000. If so, then please don’t even think of using what’s left of your home equity credit line to pay off credit cards, it could be a 30-year long payback mistake. If you do, all you would accomplish is swapping your home equity (that you would keep in a bankruptcy), in exchange for debts that you would probably discharge in bankruptcy. If you do that, you could be paying on that home equity loan every month for the next 15 to 30 years…why do that to yourself and to your family? In other words, you will be giving up what you could have kept, in order to keep what you could have gotten rid of; not a smart move.