When Should I Consider Filing for Bankruptcy?

Managing your finances responsibly may sound like an easy task, but for many, making smart financial decisions isn’t always as obvious as it seems. From accidents and unexpected illnesses that lead to medical debt to low-paying jobs and layoffs that cut income streams, there are dozens of legitimate reasons why a person may be struggling to pay off debt.

While there is no panacea to managing or eliminating debt, there are many options depending on the details of your financial situation. One option for dealing with debt is to declare bankruptcy. However, before filing for bankruptcy, it’s important to consider your full financial picture and make sure you have an understanding of the consequences—both positive and negative—of bankruptcy.

Here’s an overview of a few things you should consider when filing for bankruptcy:

What Is Bankruptcy?

Bankruptcy is a legal proceeding that happens before a court. In a bankruptcy hearing, some debts may be discharged, assets may be liquidated to pay creditors, or/and the debtor may enter into a repayment plan with creditors.

While some debts are dischargeable in a bankruptcy hearing, it’s important to note that not all debts are forgivable. What’s more, while filing for bankruptcy may give you a clean financial slate that helps you to manage your debts, it severely impacts your credit score and can make it difficult to get approved for a loan for years in the future.

Things to Think About Before Filing for Bankruptcy

If you are drowning in debt, filing for bankruptcy may be an option that’s on the table. Before you file, however, there are multiple things you should think about first. Some of the most pressing items for consideration include:

• Other debt-relief options. While bankruptcy can be a great option, note that it’s an intensive legal proceeding that can take time and money, and have long-term implications on your overall financial well-being. As such, it’s usually recommended as a last resort after other debt-relief options have been considered. Consider debt consolidation or negotiation, and talk to a financial professional about all of your options before filing.
• Types of bankruptcy. If you’re thinking about filing for bankruptcy, it’s important that you understand the types of bankruptcy and which type may be most appropriate for your situation. For individuals, the two most common types of bankruptcy are Chapter 7 and Chapter 13.

Chapter 7 bankruptcy requires a debtor to liquidate any of their non-exempt assets. In order to qualify for a Chapter 7 bankruptcy, a debtor must pass a means test proving that they don’t have the income and resources to enter into a repayment plan. The alternative for those who don’t pass the means test is a Chapter 13 bankruptcy, which requires repayment of debt through a repayment plan but also allows a debtor to keep more of their assets.

• Whether you need legal support. As you think about the bankruptcy process and the many legal documents and the court proceedings that filing for bankruptcy requires, you may consider hiring a lawyer. Before you hire a lawyer, it’s important to have a consultation first where you can ask any questions, get a feel for the attorney, and learn more about fee structures.
• Your need for immediate relief. If you need immediate relief because you are being contacted by debt collectors nonstop and are at risk of having assets seized or having your home foreclosed on, filing for bankruptcy may be your best option. This is because when you file for bankruptcy, your filing will immediately trigger the automatic stay. The automatic stay in a bankruptcy case is an immediate pause on the ability of any creditor to contact you. This can provide you with the short-term relief and breathing room you need to take charge of your financial situation.

How to Learn More About When It’s a Good Time to File for Bankruptcy

One of the most important things to know about bankruptcy is that it’s not a decision you should take lightly. Before you file, you should learn as much as you can about all of your options, as well as what the bankruptcy process entails, whether you’re qualified to file for bankruptcy and if so, which type of bankruptcy is appropriate for you, and what the short- and long-term consequences of filing for bankruptcy will be. You should also consider whether you want to work with a legal or financial professional during your bankruptcy case.

Finally, while debt can feel terrifying and overwhelming, know that there are options available. By seeking help, you can start making smarter financial decisions that support your financial well-being long term.