Knowing when to file bankruptcy
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Knowing when filing for bankruptcy is your best bet

Filing for bankruptcy is a big step that will affect your finances for years to come. The fact that you filed will remain in your credit histories for as long as 10 years, depending on whether you file for Chapter 7 or Chapter 13 bankruptcy; and while it is there, it will be more difficult for you to get new credit at affordable terms, qualify for a job, purchase insurance, and rent a place to live, among other possible consequences. Even so, sometimes filing for bankruptcy is your best option.

This chapter helps you understand when filing for bankruptcy is and isn't a good idea. Among other things, it summarizes the key advantages and disadvantages of filing, explains what bankruptcy can and can’t do for you, and debunks some of the more common misconceptions about bankruptcy.

When bankruptcy makes sense

Just thinking about filing for bankruptcy may tie up your stomach in knots and make you want to stay in bed with the covers pulled over your head. Your reaction is understandable, because even though consumer bankruptcy is a lot more commonplace than it used to be, there is still a social stigma associated with filing, and having to file can make you feel like a failure. Even so, filing for bankruptcy is a smart money move when you’ve tried everything you can to resolve your money problems and you’re still overwhelmed by debt. It’s an especially good move if you have a lot of unsecured debt (such as credit card and medical bills), because bankruptcy discharges or wipes out most types of unsecured debts. If you’re at risk for losing assets (such as your home and your car), as soon as you file, your creditors can’t continue trying to collect from you.

Here are some specific examples of when you should run, not walk, to the office of a bankruptcy attorney who can help you evaluate your situation and determine whether filing for bankruptcy is your best move:

  • You are about to lose your home in a foreclosure.
  • You believe that you are at risk for having your car repossessed.
  • Your creditors are threatening you with legal action.
  • The IRS is threatening to collect your past due federal taxes by garnishing your wages, putting a lien on one of your assets, intercepting your federal tax refund, or taking some other action.
  • Your wages are already being garnished. Filing for bankruptcy will stop the garnishment, and you may even be able to get back some of the money that has already been taken out of your paychecks.
  • Your state’s Child Support Enforcement Office is about to seize one of your assets, take money from your bank account, intercept your state or federal tax refund, or take some other action to collect your past due child support debt.

    When filing for bankruptcy doesn’t make sense

    Sometimes, even when you are overwhelmed by debt, there may be no reason to spend your time and money filing for bankruptcy. Examples of when you shouldn} file include:

    You are over 65 years of age, you are receiving Social Securitybenefits, you are not working, and you have no assets. You are over 65 years of age and you are still working, but you live in a state that doesn’t allow wage garnishment. These states are Pennsylvania, South Carolina, and Texas.

    You are permanently disabled and unable to work, your only source of income is government benefits, and either all of your assets are exempt or you have no assets. Exempt assets are assets that are protected from the collection actions of your creditors. They typically include your car (up to a certain dol- lar value), your household goods and clothing, the tools you need to earn a living, and any money you may have in a qualified retirement plan (such as a 401(k) account). Chapter 6 provides more information about exempt and nonexempt assets.

    • Avoid Bankruptcy - Mortgage Foreclosure
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    When you are able to pay your bills each month but have little or nothing left over, you are living paycheck to paycheck. This is dangerous because you are always on the brink of a financial meltdown.