Knowing when, or if, to file for bankruptcy is a tricky and highly emotional decision. Even if it’s through no fault of your own, bankruptcy seems like running into a brick wall of failure.
Logically, you know bankruptcy is common, especially in the era we live in, but when it gets personal you can lose perspective. As such, some people don’t recognize it when the moment arrives, others think they should when they can’t.
There’s actually one, top-line sign that you should file for bankruptcy: If it will unquestionably improve your life. But the devil is in the details.
Signs you should file for bankruptcy:
You’re about to lose your home
If you’re a homeowner and far enough behind on the mortgage that the bank is looming with foreclosure documents, bankruptcy is probably in your best interest.
Bankruptcy will keep you from being locked out of your house, provided that you can make up your missed payments within five years.
Your debt is mostly tied up in credit cards, medical debt or personal loans
Otherwise known as “unsecured debt,” these types of debt can be relieved with Chapter 7 bankruptcy. However, this type of bankruptcy doesn’t apply to a mortgage, car loan, student loans, back taxes or spousal and child support.
You can pass a means test
Chapter 7 bankruptcy can help if you can conclusively prove that you’re unable to pay your bills through a means test.
A means test is a calculation that takes into account your gross household income and the median household income for a comparable family in your area. If you earn less, you qualify. If you earn more, you don’t.
Signs you shouldn’t file for bankruptcy:
You own luxury items
Part of the process for Chapter 7 bankruptcy is making a comprehensive list of your assets. This includes a second car, a boat, expensive jewelry, antiques and other high-value items. You will not be granted bankruptcy if you are in possession of such items.
Each state has slightly different definitions of what constitutes non-essential property. Familiarize yourself with yours.
You can’t handle the impact bankruptcy will have on your credit score
This is a long-term issue to consider. Filing for Chapter 7 bankruptcy will negatively impact your ability to purchase a house, car or start your own business for 10 years. Chapter 13 bankruptcies will impact these actions for seven years.
A bankruptcy flag on your credit history won’t make these actions impossible, but it will make them extremely difficult.
You have problems controlling your spending
Even if you are successful in filing for bankruptcy, chronic spending on non-essential items will have you back in trouble in short order. And you can’t apply for bankruptcy again for eight years.
Credit card companies aren’t in the business of reviewing and critiquing their customers’ spending habits. They’ll be happy to enable people who have just completed bankruptcy proceedings by issuing new cards, starting the cycle all over again.
Filing for bankruptcy can be your salvation, but in some cases it can make your life more difficult. Consult a professional to make sure bankruptcy is the right decision for your situation.
