Low Salary no Excuse for Not Fixing Credit

Dear Debt Adviser,I have been trying to clean up my credit. But as a 31-year-old single mother who is not making a six-figure income, it doesn't seem as if I am ever going to get my head above water. Is it a wise decision to file for bankruptcy? One of my goals is to eventually buy a home instead of living with my sister.-- Michele

Dear Michele,I'll bet you don't know how negative you sound. It's easy to fall into the "poor me" trap when things don't seem to be going our way. But you have so many good things going on that I want to take a second to point them out. You are a parent, when many others desperately wish they had children. You have a sister who loves you enough to open her home to you and your family. You are only 31. And you have a job. Not a job with a six-figure income, but a job nonetheless. Millions of others would love to be able to say that.

So with all this going for you, why would you want to file bankruptcy? It won't help you clean up your credit. And while it may get rid of some of your bills, it won't get you a home, either. Filing for bankruptcy should typically be considered only as a last resort for debt problems. Beyond the long-term damage it will do to your credit, my experience is that it will have a negative impact on your self-esteem -- and you definitely don't need that.

On a practical level, you may not qualify for a Chapter 7 bankruptcy (debt liquidation) if your income is above your state average. And don't forget: Some types of debts aren't normally dischargeable, even in Chapter 7. These include student loans and IRS debts.

However, bankruptcy remains an option for those who really need the protection. Let's break down your situation and see if it might make sense for you.

For starters, use Bankrate's credit card payoff calculator to enter the amount of debt and the interest rate for each of your accounts. Determine how much you would need to pay each month to pay off your debt in three years. Next, take a look at your other monthly expenses -- things like child care, food and any rent to your sister. Determine if you can afford to meet the monthly amount you first calculated while still providing for monthly living expenses.

You should have a pretty good idea after this exercise of how desperate your situation really is. For example, if you need $600 per month to pay off what you owe in three years, and you realistically can only afford to pay $50 per month, you may want to discuss your options with an attorney. But if you find you could afford to pay $500 per month, you may decide to tighten your belt to come up with the additional $100 to get things paid off, or perhaps extend the time frame for paying off your debt.

Once you know where you stand, you have some decisions to make. You say your goal is to eventually buy a home. Would it be possible to stay with your sister while you pay what you owe? That will improve your credit and increase your chances of qualifying for a mortgage. If you ultimately end up filing for bankruptcy, your dream of homeownership isn't lost -- but it will be delayed.

A last bit of advice: Be sure you have enough income to support your family after a bankruptcy. Sometimes just getting rid of your debts isn't enough to balance expenses and income. Furthermore, it will be years -- how long depends on the type of bankruptcy you file -- before you are allowed to seek protection again.