At first glance, filing for bankruptcy may seem like a great way to settle your debts and move on with your life. Unfortunately, the process isn’t as simple as filling out a form and the effects of bankruptcy will stick with you for years.

bankruptcy stress

As you begin the evaluation process of whether or not bankruptcy is right for you, there are a number of considerations to take into account. This overview will get you thinking about your situation, as well as point you in the right direction for more in-depth resources when you need them.

Why Consider Bankruptcy?

If you’re considering bankruptcy, then you’re most likely feeling overburdened with debt and other financial obligations. You probably have a tough time paying your bills each month and may even worry how you’ll ever pay off some of your outstanding balances.

If you’ve already exhausted your other options, like working overtime and cutting back on your non-necessities, it might be time to seriously think about potentially declaring bankruptcy. Some signs that you might be ready include:

  • Increased interest rates because of late payments or bad credit
  • Using credit cards for daily purchases without paying off the balance each month
  • Already downsized things like house, car, and other assets
  • Working multiple shifts or jobs
  • Paying off debt with retirement funds
  • Wages are being garnished

If one or more of these situations apply to you, then you should probably continue your research into bankruptcy. If not, try finding other ways to improve your financial situation. For example, you could rework your budget if there are easy places to cut back on.

You can also try negotiating with your lenders, particularly if you’re experiencing just a short-term setback. Most lenders are willing to work with you, and would much rather set up a new payment plan than have the debt discharged or settled through bankruptcy.

Understanding Bankruptcy and Alternatives

Filing for bankruptcy takes careful planning. Due to the long-term legal and financial consequences of declaring bankruptcy, there are many rules that must be followed before you’re eligible.

For example, it’s necessary to show the courts you have obtained credit counseling and considered alternatives. Bankruptcy is controlled exclusively by the federal judicial system, which strongly recommends hiring an attorney or seeking free legal services before attempting to file.

Creating a Checklist to Avoid Dismissal

Before filing for bankruptcy, there are a number of important questions you should ask yourself. There are also several key steps that you need to take. First, it’s necessary to ask yourself if you really need to file for bankruptcy.

If you don’t, you probably won’t be approved anyway. You also need to calculate income, expenses and assets, find a trustworthy attorney, and select a credit counseling program.

It’s helpful to be methodical and to use a checklist. Failure to take the right steps and find the right credit counseling could result in more wasted money and a bankruptcy dismissal where they throw out the case.

Reasons to Delay Bankruptcy

Even if bankruptcy is the best choice for you, there may be some situations where it’s smart to delay the process so you can maximize your benefits. First, if you had a high income within the last six months that no longer applies to your situation, then you might want to wait.

That’s because the court weighs your last six months of income to determine your eligibility for Chapter 7. If you had a nice monthly salary a few months ago but have been laid off since then, that means test isn’t going to reflect your current situation accurately.

Another reason to delay bankruptcy is if you are anticipating an upcoming major debt. New debt isn’t allowed to be discharged once you file for bankruptcy.

So, for example, if you’re about to have a major medical surgery, you might consider waiting until it’s over to include it as part of your bankruptcy plan. Talk to a professional to see the eligibility requirements. Luxury items charged right before bankruptcy, for example, likely won’t be included as part of your debt discharge.

Changes in Bankruptcy Law

Before getting started, it’s important to note certain changes in bankruptcy laws. These changes went into effect in 2005 under The Bankruptcy Abuse Prevention and Consumer Protection Act. While the changes don’t affect some people applying for bankruptcy, they may affect others.

The law requires mandatory credit counseling to make sure you fully understand the consequences of declaring bankruptcy. It also created stricter eligibility requirements for Chapter 7 bankruptcies. For Chapter 13 bankruptcies, the law requires tax returns and proof of income.

An informed decision begins with understanding the law, the bankruptcy process, and what has changed. It’s important to better understand the changes in bankruptcy law before you make any final decisions.

Filing Under Chapter 7 or Chapter 13

Understanding how bankruptcy works means understanding the process and laws related to Chapters 7 and 13 of the Bankruptcy Code. Depending on the details of your financial situation, you might be eligible to file under Chapter 7 or Chapter 13. Which route you choose has a lot to do with your income and what assets you want to keep.

Your debts can either be resolved quickly or over a several-year period. It’s helpful to read up on in-depth frequently asked questions related to each route. Check out our resources on Chapter 7 bankruptcy FAQs and Chapter 13 bankruptcy FAQs.

Calculating Chapter 7 Bankruptcy Means

To have all your unsecured debts completely eliminated under Chapter 7, you must qualify under the Chapter 7 means test. Using your personal information, or a basic estimate, an online calculator can help determine this for you. When filing, you must also fill out an appropriate form in which you enter your income, expense information, and data from the Census Bureau and IRS.

If you don’t meet the income level requirements for a Chapter 7, you can still file for Chapter 13, which settles many of your debts after you successfully complete a three to five-year repayment program.

Qualifying and Qualifying Debts

Your debts qualify for bankruptcy relief when you can prove you are unable to pay them, but a great deal depends on your financial situation and which chapter you are filing under. Debts can be either unsecured or secured. Secured debts include mortgages, cars, and debts related to a property you’re still paying for.

Unsecured debts include credit cards, bills, collections, judgments, and unsecured loans. More essential than knowing which debts qualify for bankruptcy is knowing whether or not your own financial situation makes you eligible for this major step. To determine this, a full financial assessment is necessary. You can start by reading more about debts that qualify.

Defaulting on a Student Loan

If you have defaulted on a student loan, there are several options open you. Bankruptcy is one of them, but if your goal is to have a student loan discharged under Chapter 7, this can very difficult.

Nevertheless, taking certain steps as soon as possible can help prevent wage garnishment, and knowing your options can help you make the best choice before matters become more difficult. Under Chapter 13, your defaulted loan can be consolidated with your other bills, giving you a better payment plan or a temporary reprieve from making payments.

If you have a federal student loan, check out your repayment options, especially if you are facing financial hardship. Otherwise, read more to figure out how to pull yourself out of student loan default.

What Assets You Can Keep During Bankruptcy

Depending on how you file for bankruptcy, there are certain assets you can keep. Different states have different exemptions, and in certain states, you can choose between state and federal bankruptcy exemptions.

If you need to have debts discharged, are out of work, and cannot afford a repayment plan, some assets might be lost. In most cases, however, people who file for bankruptcy can keep their homes and cars and much of what they own while they repay their debts under a modified plan. It all depends on your unique circumstances and how you file.

Get a FREE Credit Evaluation Before Filing Bankruptcy

Before you file bankruptcy, you should talk to a credit specialist. Filing bankruptcy is a decision that can affect your credit for 7 to 10 years and should be considered a last resort option when all other options have failed. Many times people file bankruptcy when it is completely unnecessary. A credit professional can help you fix your credit and deal with your creditors so you can avoid filing for bankruptcy.

Talk to a Credit Specialist before Filing for Chapter 7 Bankruptcy:

Call 1 (800) 220-0084 for a FREE Credit Consultation with a paralegal.