What Should You Consider Before Filing For Bankruptcy to Deal with Your Debts?

Posted on December 9, 2020 by Contributed in Contributed

If you’re in a troubling financial situation, there’s a good chance that you might be thinking about filing for bankruptcy in order to deal with your debts. Unfortunately, filing for bankruptcy isn’t something that you should do without first considering other options. Bankruptcy could leave you with a poor credit rating for many years and it can severely limit your financial options. If you think there’s a small chance that you can overcome your debts without resorting to bankruptcy, then you may want to consider those options first.

So in this post, we’re going to take a look at some considerations to keep in mind before you consider filing for bankruptcy.

What exactly does bankruptcy mean?

First, let’s take a look at what bankruptcy means for you.

In technical terms, bankruptcy is a legal proceeding that takes place when you’re unable to pay outstanding debts. Bankruptcy usually begins with a petition that you fill in and sign. In some cases, your creditors might be the ones to fill in the form instead if you’ve spoken with them and have said you’re unable to pay them back due to your financial situation.

Once the process begins, the goal of bankruptcy is to try and alleviate as much of your debt as possible. There are some cases where you might still need to pay back some of the money you owe and it varies on a case by case basis. Some people find that they won’t owe anything after the bankruptcy ends, but others might find that they need to sacrifice some of these assets in order to meet the conditions.

Are there different types of bankruptcy?

Yes, there are multiple different kinds of bankruptcy.

It’s important that you learn about the different types of bankruptcy because it drastically changes your options and what you can keep. There are six different types of bankruptcy:

Chapter 7: Liquidation
Chapter 9: Municipalities
Chapter 11: Large reorganization
Chapter 12: Family farmers
Chapter 13: Repayment plan
Chapter 15: Used in foreign cases

In most cases, you’ll only need to concern yourself with chapter 7 and 13 bankruptcies. Since these definitions can be difficult to understand, it’s wise to speak with a specialist such as Leinart Law Firm or any local bankruptcy lawyer to help you out. This will ensure that you understand exactly what you’re getting into with your bankruptcy so that you’re informed about the choice you’re about to make.

Can you avoid bankruptcy in the first place?

In many cases, yes. With a strong personal finance strategy, you could potentially get out of debt without the need for bankruptcy or any other kind of service. While this is difficult, it’s certainly not impossible.

Avoiding bankruptcy generally involves developing frugal practices and looking for more ways to generate income. For example, you might find that it’s beneficial to start up a business or take up a second job to help you pay off your debts faster. Alternatively, you could make more money by simply saving more and spending less money on large expenses and luxuries.

Many of these changes take a long time to develop, so it’s a good idea to practice budgeting skills and learn more about good financial management as early as possible.

Good reasons to file for bankruptcy

Next, let’s take a look at some good reasons why you might want to file for bankruptcy.

You’ve tried other ways to get around your debts but none of those options work. There are plenty of other debt solutions such as debt consolidation, debt settlement and even credit counselling. Make sure you try these options first. If they don’t work, then you should consider bankruptcy as a last resort.

You’re being forced to borrow money or use credit for basic everyday items. If you can barely afford essentials such as food and rent, then it’s important to consider bankruptcy as an option to help you with your debts. You should never be in a situation where you need to borrow or use credit just to stay healthy.

Your interest rates are going up and there’s no way to pay off those debts. If you’re worried about interest rates going up, you may want to consider taking out all of your debts at the same time by filing for bankruptcy. This is the best option if you have assets that you don’t want to lose due to rising interest rates. Your debts can spiral out of control if you’re not careful, so you should keep it under control as best as you can.

You’re using cards to pay off cards. Using credit to pay off credit results in an endless loop that always causes you to lose due to interest rates and fees.

You’re working multiple jobs to pay off your debts. Working multiple long jobs isn’t sustainable under most conditions. Don’t stress your body out even more just to pay off your debts.

Your debts are causing you real stress that affects your daily life. If you’re dealing with debt-related stress every day then you may want to consider getting over your debts with a bankruptcy claim. This will give you some room to breathe and can help you slowly restore your financial security.

Your wages are being garnished by your creditors. Wage garnishment means that your workplace has been ordered by the court to withhold some of your wages to give to your creditors to pay off your debts. In this situation, you may want to consider filing for bankruptcy especially if that money they’re taking is necessary for your daily needs.

You have no more savings to pay for basic things. Saving money is important to ensure that you always have emergency funds for various things. However, if you’re running low on your savings and are struggling to afford basic things, then your time’s almost up and you should consider bankruptcy.

You’re digging into your retirement fund to pay for necessities. Much like the previous point, digging into emergency funds is never a good sign. Makes sure you consider bankruptcy as most claims won’t be able to touch your retirement fund.

Your financial situation is starting to affect your relationships. Lastly, consider bankruptcy if you feel like your debt situation is getting worse and starting to negatively affect your relationships with other people.

If any of these points represent your situation, then it’s a good idea to consider filing for bankruptcy.

Bad reasons to file for bankruptcy

There are also a couple of bad reasons to file for bankruptcy that you need to look out for. If any of the below applies to you, then you may want to reconsider your options.

You want creditors to leave you alone. We know that dealing with creditors can be frustrating and sometimes distressing. However, if you’re looking to file for bankruptcy just to get them off your back, then you’re going to end up in a bad financial situation.

If you can sell your assets to pay off your debts. If you’re able to sell off your assets to pay for your debts then you should do it. Otherwise, filing for bankruptcy will still take away those assets but give you a much lower price for them.

If you think that bankruptcy gets rid of all of your debts. Unfortunately, some debts cannot be discharged even with a last-resort option such as bankruptcy claiming. This includes alimony and child support, certain unpaid taxes such as tax liens, and even student loans in some cases.

If you’ve only recently lost your job. If you’ve only recently lost your job then your income will be calculated with those paychecks included. As such, you may want to wait a little while before filing for bankruptcy.

If you’re expecting to go into deeper debt soon. Your bankruptcy claim will only count from the date that you file it. As such, you should wait for all of your debts to pile up before you knock them out with a single bankruptcy claim.

If you have no income, savings or assets. Most people will find that it makes sense to file for bankruptcy when you’re unemployed. Since you’re not making any money and you’ve got a lot of debts to pay, it seems like the perfect time to file for bankruptcy. Unfortunately, this isn’t the case. If you don’t have any income then you probably have nothing for creditors to take. This means that you should look for other options because the worst you’ll have to deal with is angry phone calls from collectors.

Some final words of advice

Bankruptcy is often considered a last resort option for many people. This is usually because there are long-term consequences for filing for bankruptcy, so you should only consider it if there’s no other choice. As such, we highly recommend speaking with debt solution specialists and lawyers to ensure that you’re picking the right option to get rid of your debts.

Photo by Katie Harp on Unsplash

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