How to Know When to File for Bankruptcy

By eHow Legal Editor

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Bankruptcy is intended to help debtors who are honest but cannot handle their debts, making it somewhat difficult to know when to file for bankruptcy. You may be facing debts that could be paid if you simply had additional time, or you could be struggling against debt that you have no hope of ever handling. If you know the difference between these two situations, you'll know when to file for bankruptcy.

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Instructions

Difficulty: Easy

Step1

Contact a non-profit credit counseling service. If a credit counseling service charges a fee, then it is most likely running a scam. A good credit counselor will be able to go over your debts with you and determine if you should file for bankruptcy.

Step2

Complete a bankruptcy means test. This test is a requirement when you file for bankruptcy and can help you determine whether a judge might dismiss your petition for bankruptcy.

Step3

List out your income and debts. As a general rule, if your monthly household income is more than 25 percent of your debt after standard expenses (like rent and food), you will not be able to convince a judge to grant your bankruptcy.

Step4

Review your alternatives, such as debt consolidation and credit repayment plans. If you can avoid a black mark like bankruptcy on your credit report, you should.

Step5

Consult with a bankruptcy attorney. Many lawyers will offer a free initial consultation, and free legal aid is available in many areas to help you sort through the legal complexities. A lawyer may also be able to suggest alternatives.

Tips & Warnings

There are a few alternatives to bankruptcy which can help protect your credit record. However, if you do not file for bankruptcy, you still legally owe the full sum of your debt to your creditors.
Even when you have made your decision, you can still change your mind at a later date. You can voluntarily dismiss a bankruptcy or choose to file at a later date.
You can benefit the most from bankruptcy if the bulk of your debt is unsecured, as is the case with credit cards and hospital bills.
Even individuals with heavy debt may be better off not declaring bankruptcy. Each case differs, so speak with a debt expert or financial adviser before taking the plunge.
There are numerous myths about bankruptcy which make many people uncomfortable with the process. Such myths include the belief that you can only file for bankruptcy once and that you have to file for bankruptcy if your spouse does.