How To Know if You Should Declare Bankruptcy

Any one or a combination of the following factors could make you a good candidate to file for bankruptcy:

- You are underwater on a mortgage and are concerned about foreclosure or losing your home
- You are far behind on your bills or the amount you owe is greater than your income
- You are unemployed and have been for an extended time and have no unemployment income or savings
- You are unable to make even your minimum payments on your debts
- You can no longer afford basic necessities
- You’re being bombarded by collections calls
- A debt collection lawsuit has been started against you
- Your wages are being garnished or your bank accounts have been frozen
- You are behind on your taxes
- You have significant debt with no realistic way to repay it within the next several years 

Before making the decision to file for bankruptcy, consider the pros and cons of declaring bankruptcy.

Filing for bankruptcy automatically puts foreclosure proceedings on hold and stops all collection efforts against you. Bankruptcy can also end wage garnishments, stop repossessions, and prevent necessary utilities from being shut off.
In Chapter 7 and 13 bankruptcies, you may qualify for exemptions, which could allow you to keep certain assets, including your pension, retirement account and life insurance, and in some cases, even your home and other specific personal assets. Credit card and other unsecured debts can be entirely wiped out.

A Chapter 7 bankruptcy can be completed in less than 6 months and then you can begin to re-establish your credit. In that same six months, the increased damage to your credit could be much greater if you continue to miss payments and amass penalties and fees, increasing your debt even more. After a Chapter 7 bankruptcy has been completed, any income you earn or property you purchase will be yours to keep. You can usually get new credit in 1-3 years.

If you do not qualify for Chapter 7 bankruptcy, filing for Chapter 13 bankruptcy can help you get more time and more favorable terms to pay off your debts, and you get to keep all of your property.

Declaring bankruptcy means you will be disclosing all of your financial information to the court. Depending on which type of bankruptcy you file, might lose some of your property, including your credit cards, your home, and other personal possessions, if you do not qualify for exemptions.

Declaring bankruptcy can drop your credit score by as much as 200 points, and the bankruptcy will remain on your credit report for 7-10 years, depending on which type of bankruptcy you file. For several years after you declare bankruptcy, it can be difficult to get a loan, including a home loan or car loan, and obtain other financing or credit, including credit cards. Any new credit you do manage to obtain after a bankruptcy will likely have low limits and high interest rates. 

A bankruptcy could also make it more difficult – and more expensive – to get certain types of insurance, and your existing rates will probably increase. You may be limited in where you can live; some landlords review credit reports and may reject your rental application or charge you a higher security deposit after a bankruptcy.

Some debt also cannot be discharged even in a Chapter 7 bankruptcy, including student loans, child support, maintenance or alimony payments, and back taxes. A trustee might be assigned to you for three to five years who will oversee when and how you can spend your money. If someone co-signed on your financial obligations, a bankruptcy will only wipe out your obligation to repay those debts; your co-signer will still be responsible for repaying the entire amount of the debt if you file under Chapter 7 (a Chapter 13 filing will protect both of you).

Before declaring bankruptcy, you should explore all of your potential options, including debt consolidation, credit counseling, financial coaching, loan modification, refinancing, and negotiating with creditors and banks to establish more favorable terms or more time to repay your debts. An experienced bankruptcy attorney can help you to decide which option is best for you and your family. Find a qualified bankruptcy lawyer by posting a summary of your legal issue on our site.

Related: Is Bankruptcy the Right Option For Your Debt Management?