When Should I File for Bankruptcy?

When Should I File for Bankruptcy?

Tuesday, 03 December 2019 11:49

Last year, over 750,000 individuals in the United States filed for bankruptcy. While circumstances are as diverse as the people filing, many view bankruptcy as a last resort. They have struggled with debt, and it has grown beyond their ability to repay it. It can feel as if your life - not just your finances - is spiraling out of control. Know that you are not alone; hundreds of thousands of people are facing this battle. If you can no longer keep up with payments, putting bankruptcy on the table for consideration is important. 

Facing Significant Financial Distress

Typically, when people find themselves unable to make the car payment or fall behind on their credit card bills, they try various ways to manage debt. These may include negotiating with creditors (for example, your credit card provider may waive late penalties if you begin making payments), inquiring about hardship programs (again, many credit card companies have these, as do medical institutions), transferring balances to a low-interest credit card, consolidating “bad” debt into a personal loan, or trying to reach a debt settlement agreement.

Bankruptcy is not a solution for a temporary and fixable financial situation. Generally, people who file or are considering filing have not been successful with other debt management methods and feel they have no other option. 

Bankruptcy provides protections, but because it also has long-lasting consequences, it is not a process anyone should enter into lightly. You might strongly consider it if:

  • You’re getting frequent calls from debt collectors. It can get so bad that you start to panic when the phone even rings. When you file, creditors are prohibited from attempting to recover the debt from you.
  • Your home is at risk. If you are in danger of foreclosure, Chapter 13 bankruptcy can allow you to develop a play to repay this debt. If you file for Chapter 7, your home is only exempt if you are current with your payments and have little to no equity. In other words, with Chapter 7, you may lose your house.
  • You rely on loans to pay bills. Payday loans, credit card cash advances, and other short-term, high-interest vehicles do give you a quick infusion of cash to help you cover bills and other expenses - but you’ll pay heavily for it. Often, people find themselves unable to pay the loan, putting them in an even worse financial situation.
  • You’re pulling from your retirement accounts. We strongly advise you to never touch your retirement to pay debts. If you’re in deep debt, keep these funds. Retirement money is exempt in bankruptcy; trustees cannot touch it.
  • You are about to incur major expenses. Say, for example, that you need to have a surgical procedure, and even with insurance, you’ll be left with a hefty bill. It may be prudent to go ahead and have the surgery and file bankruptcy after so it is included in the settlement. 

    There is a significant “but”  here: courts do not take kindly to people running up credit cards, for example, right before filing for bankruptcy. If it is determined that you incurred charges you never intended to pay, then those debts will not be discharged with bankruptcy. Courts pay particular attention to the charging of luxury goods (basically non-essentials) and cash advances. 

  • You are aware of the consequences of filing for bankruptcy. While bankruptcy does help you dig yourself out from a mountain of debt, there are serious consequences to keep in mind: 
    • The bankruptcy will be on your credit report for a number of years and your credit score will take a hit
    • Debts that have been discharged still appear on your credit report
    • It may be difficult to obtain credit and terms may not be favorable
    • You cannot file again for eight years, so if you fall into debt trouble, you cannot use bankruptcy to help.

If you are aware of these factors and wish to continue, we can help. Contact our team today for a consultation