How to Know If You Need to Declare Bankruptcy
For someone with large amounts of debt, the decision of whether to file bankruptcy is an extremely important one, and one that should be well thought out and researched. Bankruptcy is a legal proceeding whereby some or all of a person's debts are eliminated, or a payment arrangement is set up to pay the debt over time. Dealing with debt and bankruptcy is a stressful experience, and often the cause is something outside of the person's control, such as illness or a job loss. However, many people have gone through bankruptcy and experienced success and a fresh start in life after that.
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Instructions
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Gather all of your bills to determine your debt. These include credit cards, car loans, student loans, mortgage payment, medical bills, utilities, personal loans and any other organizations or people to whom you owe money. Note that certain types of debt, such as student loans, will not be discharged in bankruptcy so you will still need to pay them even if you file for bankruptcy.
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Obtain your credit reports from the three major credit reporting bureaus, Experian, Equifax and TransUnion. At AnnualCreditReport.com, you can obtain these credit reports for free once per year. Follow the instructions on each site to get your reports.
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Determine how much money you owe to each creditor. A simple way to do this is to write down list of your creditors on a piece of paper and the dollar amount owed to each one.
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Evaluate your credit reports, and determine how much collections activities and late payments have already affected your credit. Also assess how much more a bankruptcy would damage it. Review your FICO ratings for creditworthiness. You can obtain your FICO score for a nominal fee when you get your credit report. A FICO number of 750 or higher is considered excellent, and any score below 620 is not good, according to CreditScoring.com.
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Generate a budget of all of your income and expenses. Determine whether you will be able to pay off your debt in a time frame that is reasonable to you or whether this is unrealistic. In general, if you do not have enough money left over every month, after you pay your mortgage/rent, utilities and basic necessities, to pay your debt within three years, bankruptcy could be the route for you to pursue.
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Learn about the different types of bankruptcy. For consumers who file, the two options are Chapter 7 and Chapter 13 bankruptcy. Chapter 7 eradicates many or all of your debts, such as credit card debt and medical bills. If you owe child support, taxes or student loans, Chapter 7 does not eliminate these--you will still need to pay them. Chapter 13 requires you to make payments on your debts over time, paying them off in three to five years.
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Determine whether you qualify for Chapter 7 or Chapter 13 bankruptcy. A decisive factor in this is your income. You will need to pass a means test to file for Chapter 7, where your income will need to be below the median average for the same household size in your state. If your income is too high based on this test, Chapter 13 is your only bankruptcy option.
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Learn about the rules for the type of bankruptcy for which you qualify. Be aware of what will happen to your property, such as retirement plans, vehicles and any assets during bankruptcy. For example, your state may allow you to have a vehicle worth a certain amount of money as part of your assets during bankruptcy. However, if you have equity in your vehicle, you might lose it during bankruptcy. The laws vary from state to state, but in most states, bankruptcy will not mean that you lose pension and retirement accounts. Also, be familiar with bankruptcy's effects on your mortgage and any equity you have in your home. If you have a significant amount of equity in your home, you could lose it during bankruptcy.
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Investigate all of your options for resolving your debt. These include paying off your total debt over time, bankruptcy, debt consolidation, payment plans and negotiations with creditors for lower amounts than what you actually owe. Most of these options have both pros and cons. For example, there can be tax penalties if you agree to pay the creditor an amount lower than what you owe.
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Decide whether any of the alternatives to bankruptcy are viable options for you. If they are, consider pursuing these. A bankruptcy filing remains on your credit report for up to 10 years and can make it more difficult to obtain credit in the future. A bankruptcy also becomes public record. Some employers check potential employees' credit reports in making hiring decisions, so having gone through bankruptcy could affect your future ability to get a job.
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Assess the toll your debt is taking in areas of your life, such as health, stress levels, relationships and career. Decide which option is best for your situation and cause the least damage in those areas.
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Tips & Warnings
It's wise to hire an attorney who can help you decide whether bankruptcy is the best option for you. You can schedule a short consultation with an attorney to discuss this, and many attorneys do initial appointments at no cost to you. You can obtain free annual credit reports from all three major reporting bureaus at AnnualCreditReport.com.
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