What was once a last resort is now a popular choice for many Americans struggling with debt. According to the U.S. courts, nearly 400,000 people filed for bankruptcy in 2021 alone. If that number shocks or surprises you, don’t worry—you’re not alone.
For a lot of people, the idea of bankruptcy is shrouded in mystery and misconceptions. In reality, it’s not as complicated or scary as it seems. In this article, we’ll debunk some of the most common myths about bankruptcy and help you understand when it might be the right choice for you.
So, when does it make sense to file for bankruptcy? That’s what we aim to answer here. But first, let’s take a step back and understand what bankruptcy is and the different types that exist.
What Is Bankruptcy?
Bankruptcy is a legal process that provides debt relief for individuals and businesses. It can be filed by anyone who owes money to creditors and is unable to pay. When you file for bankruptcy, an automatic stay goes into effect. This means that your creditors are no longer allowed to contact you or take any action to collect the debt.
There are different types of bankruptcy, but the two most common are Chapter 7 and Chapter 13. Yes, there are others. But don’t worry; we’ll get to those in a moment.
Chapter 7 vs Chapter 13
In order to qualify for Chapter 13, you must have a regular income and your unsecured and secured debt must be less than $2,750,000. These amounts are adjusted periodically to keep up with inflation.
Other Types of Bankruptcy
As promised, there are other types of bankruptcy. While they’re not as common as Chapter 7 and Chapter 13, it’s important to be aware of them.
Now that we’ve gone over the different types of bankruptcy, let’s talk about why you would want to consider filing.
Why File For Bankruptcy?
It’s a common question with a not-so-common answer. While the idea of bankruptcy may send shivers down your spine, it might be the best thing for you and your family. Filing for bankruptcy is a legal process that provides people with a fresh start by eliminating most, if not all, of their debt.
For some people, bankruptcy is the best option because of:
- Mounting Medical Expenses: A major health crisis can quickly become a financial one if you’re not insured or underinsured. Even with insurance, medical bills can easily reach into the hundreds of thousands of dollars.
- Loss of Job: A job loss is another common reason people file for bankruptcy. If you’ve been laid off or had your hours slashed and don’t have enough saved up to cover your living expenses, bankruptcy can give you the breathing room you need.
- Divorce: Divorce is one of the most stressful life events, and it can be made even more difficult if you and your spouse are fighting over money. Filing for bankruptcy can give you a clean slate financially and help you move on with your life.
- Sudden Emergency: An unexpected emergency, such as a car accident or a fire in your home, can leave you with hundreds or even thousands of dollars in debt. If you don’t have enough money to cover the costs, bankruptcy can help.
- Irresponsible Money Management: If you’ve made some bad financial decisions in the past, such as using credit cards to pay for unnecessary purchases, you may find yourself in over your head. Filing for bankruptcy can help you get rid of that debt and start fresh.
If any of these situations sound familiar, you may want to consider bankruptcy. But how do you know if it’s the right decision for you? There are a few things to consider before you file…
What Happens When You Declare Bankruptcy?
The thought of bankruptcy may make you feel like you’re about to take a walk off a cliff. But it doesn’t have to be that scary. Here’s what you need to know about declaring bankruptcy.
When you file for bankruptcy, an automatic stay is placed on all your collections activity. This means that your creditors can no longer try to collect from you. They also can’t initiate or continue any lawsuits against you. The automatic stay is in place until your bankruptcy case is over.
Once you file for bankruptcy, you’ll need to attend a meeting of creditors. This is where your creditors will have a chance to ask you questions about your finances and your bankruptcy petition. You’ll also need to provide documentation of your income and expenses.
After the meeting of creditors, your case will be either dismissed or converted to a Chapter 7 or Chapter 13 bankruptcy. If your case is dismissed, you’re no longer bankrupt and your creditors can start trying to collect from you again. If your case is converted, you’ll need to follow the repayment plan laid out in your new bankruptcy chapter.
A Chapter 7 bankruptcy will stay on your credit report for 10 years. A Chapter 13 bankruptcy will stay on your credit report for seven years. But that doesn’t mean your credit is ruined for those 10 or seven years. You can start rebuilding your credit as soon as your bankruptcy case is over.
Declaring bankruptcy isn’t an easy decision. But it can give you a fresh start financially. If you’re considering bankruptcy, talk to a bankruptcy attorney to learn more about your options. They are there to handle all of the legal aspects of your case and can help you make the best decision for your unique situation.
The legal requirements associated with bankruptcy are comprehensive and often make people run in the opposite direction. However, if you are unable to pay your debts, then bankruptcy may be the best option for you.
Your bankruptcy attorney specializes in this type of thing and can make the process effortless for you so that you don’t have to worry about a thing.
Bankruptcy can be an intimidating topic, but it doesn’t have to be. With the help of a bankruptcy attorney, you can get a fresh start financially.
When To Declare Bankruptcy?
We now get to the part you’ve likely been waiting for (or dreading). You can relax, though, because as we’ve stated, declaring bankruptcy isn’t as complicated or as scary as you might think.
Now that you have a good idea of what to expect from the process, let’s switch gears and focus on when it’s the right time to file.
The general rule of thumb is that if your debts are manageable and you think you can make headway on paying them off within a few years, then it’s probably not worth declaring bankruptcy. On the other hand, if your financial situation is dire and there’s no way you can climb out of the hole you’re in, then it might be time to consider bankruptcy.
Of course, there are a few other factors to take into account before making a final decision. Let’s look at each one individually to give you better clarity on when to declare bankruptcy.
You’re Only Making the Bare Minimum on Your Debt Payments
If you’re only making the minimum payments on your debts, then it’s a good indication that you’re in over your head. Sure, everyone gets behind on their bills from time to time. But if you find yourself in this situation month after month with no end in sight, then bankruptcy might be the best option.
Keep in mind, though, that even if you are only making the minimum payments on your debts, you might still be able to work out a repayment plan with your creditors. If you’re confident that you can stick to the plan and make headway on paying off your debts, then this could be a better option than declaring bankruptcy.
Your Debts Are Constantly Growing
If your debts are constantly growing—despite your best efforts to keep up with the payments—then bankruptcy might be your best option. This is especially true if the growth of your debt is due to high-interest rates.
It’s a good indication that you’re struggling to keep up when you’re only making the minimum payments on your debts each month. This is because the minimum payments are usually only enough to cover the interest, which means the principal balance isn’t budging.
Moreover, this leads to mounting debt that can feel impossible to pay off. If this is your situation, then bankruptcy might be the best way to get a fresh start.
You’re Unable to Meet Your Financial Obligations
If you’re struggling to meet your financial obligations, such as rent or mortgage payments, utilities, and insurance premiums, then it might be time to consider bankruptcy.
It’s common for many people to experience the occasional tight month, but if you’re consistently having trouble meeting your obligations, then it’s a sign that your financial situation is unsustainable. And that usually translates to an inability to get caught up to where you’re comfortable.
You’re Dodging Bill Collectors Like Sniper Fire
If you’re constantly on the run from bill collectors, that’s a pretty good indication that it’s time to declare bankruptcy. Not only is this an incredibly stressful way to live, but it’s also futile.
At some point, the bill collectors are going to catch up with you. When they do, they’re likely going to take aggressive steps to get the money you owe, including wage garnishment and asset seizure.
To avoid this situation, it’s best to declare bankruptcy before the bill collectors start coming after you. This will give you some protection from their attempts to collect on your debt.
You Rely on Credit Cards to Pay for Almost Everything
It’s normal for people to use credit cards for everyday purchases. However, if you find yourself using credit cards to pay for basic necessities like food and clothing, then it’s a sign that you’re in over your head financially.
If you’re constantly maxing out your credit cards and only making the minimum payments, then it’s going to be very difficult to get out of debt. In this case, bankruptcy might be the best option for you to get out from under your debt burden.
You’re Unable to Make Your Minimum Credit Card Payments
If you’re only making the minimum payments on your credit cards, then it’s going to take you a long time to get out of debt. In fact, it could take decades. And during that time, you’ll end up paying a lot in interest.
Bankruptcy can provide the freedom from your debt that you need to get back on your feet. With bankruptcy, you can get rid of your credit card debt and start fresh.
Your Wages Are Being Garnished
If your wages are being garnished, it’s a sign that you’re in serious financial trouble. If you’re unable to make your minimum payments and your creditors are taking legal action to get their money, then bankruptcy might be your best bet.
Filing for bankruptcy will stop wage garnishment immediately. Not only that, but you may even be able to get some of the money that was already garnished back.
You Don’t Know How Much Debt You Have
If you have no idea how much debt you’re in, then it’s time to take a deep breath and assess your financial situation. It might be daunting, but it’s important to know exactly how much debt you have so you can make an informed decision about whether or not bankruptcy is the right solution for you.
If any of these hit a little too close to home, it’s time to get serious about evaluating your financial situation. If you’re not sure whether bankruptcy is right for you, don’t hesitate to reach out to a financial advisor or bankruptcy attorney for help. They’ll be able to give you tailored advice based on your unique circumstances.
Alternatives To Filing Bankruptcy
Assuming that you are not in an emergency situation where you need to file for bankruptcy immediately, you might want to explore some alternatives to this process. Depending on your unique circumstances, one of the following might be a better option for you than declaring bankruptcy.
If you have a lot of debt from different sources, it might be helpful to consolidate that debt into one loan. This can make it easier to keep track of your payments and may help you get a lower interest rate.
If you are unable to pay off your debts, you might be able to negotiate with your creditors to settle the debt for less than you owe. This can be a difficult process, but it may be possible to get a significant reduction in what you owe.
If you need help getting your finances under control, credit counseling could be a good option for you. A credit counselor can help you develop a budget and create a plan to pay off your debts.
Negotiate with Creditors
If you are having trouble making your payments, you might be able to negotiate with your creditors to get a lower interest rate or other concessions. This isn’t always the easiest option, but it may be worth exploring to get the peace of mind you seek.
Still not confident that any of the above options are right for you? Don’t hesitate to explore the option of bankruptcy. It may not be ideal, but it could give you your life back.
Can I get a credit card after bankruptcy?
Unfortunately, you won’t be able to get a new credit card right away. It may take a few years for your credit score to recover. In the meantime, you can use a prepaid credit card or a secured credit card.
What debts will not be forgiven?
Some debts, like student loans and taxes, can’t be discharged through bankruptcy. You’ll still be responsible for repaying those debts even after you file for bankruptcy.
Can I get a mortgage after bankruptcy?
You can, but it’s going to be difficult. Most lenders require you to wait at least four years after filing for bankruptcy before they’ll consider approving you for a mortgage. And even then, you’ll probably need to pay a higher interest rate.
Does bankruptcy affect my taxes?
No, bankruptcy does not affect your taxes. But if you were expecting a refund, it will likely be used to pay off your creditors.
Does Bankruptcy affect my spouse?
Bankruptcy will not affect your spouse in most cases. However, if you have joint debts, those debts will still need to be repaid.
Does bankruptcy affect child support?
No, bankruptcy won’t affect child support, as child support payments are considered a priority debt. That means they must be paid first. What’s more, your bankruptcy trustee is required to report all child support matters as part of their job.
Does bankruptcy affect my job?
Your employer isn’t legally allowed to use your bankruptcy filing to punish you in any way. So no, it won’t affect your job. But if you try to apply for a new job, potential employers may be able to see that you’ve filed for bankruptcy, and that could affect their decision to hire you.
Does bankruptcy affect my 401K?
Bankruptcy does not affect your 401(k). Most retirement accounts are protected against creditors following bankruptcy.
Have any questions or comments? Feel free to contact me.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.