When to File for Bankruptcy Protection
Deciding when to file bankruptcy is almost as important as deciding to file bankruptcy in the first place. If creditors file a lawsuit against you, it may make sense to file bankruptcy sooner rather than later. Other times, such as if your income is too high to qualify for bankruptcy, you might consider waiting. The specific details of your financial situation will determine when is the best time for you to file bankruptcy.
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Too Much Debt
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The first indication that it may be time to at least consider filing bankruptcy is if there is reasonably no way to repay your creditors. One of the ways to gauge this is by using the bankruptcy means test, which is found on Bankruptcy Form 22A. According to this test, if you cannot pay 25 percent of your outstanding debt over a five year period, then you can probably qualify for a Chapter 7 bankruptcy. If you can qualify for Chapter 7, or "straight" bankruptcy, it may be an indication that you are in over your head when it comes to debt.
Creditor Harassment
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When you fall behind in your payments, your creditors will start to pursue you for repayment. Usually, they will call you and send letters, and the further behind you fall in your payments the tactics will become more aggressive. If you miss more than a few payments, the calls may be nearly incessant and bordering on harassment. Filing bankruptcy will remove that stress from your life. When the court receives your petition, it will issue an "automatic stay," which is an order preventing creditors from coming after you. If you can't take the daily contact, you might consider the protection of the automatic stay.
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Qualification
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Before you think about filing bankruptcy, you should see if you even qualify. The most basic consumer bankruptcy, Chapter 7, requires you to qualify by having a low-enough income. See if you qualify by taking the means test on Form 22A. If your income is high but you anticipate it will drop over the next few months, you might want to wait until your income is low enough to qualify.
Nothing to Lose
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One of the best times to file Chapter 7 bankruptcy is when you have a lot of debt and nothing to lose in terms of possessions. A provision of Chapter 7 is that you have to give up any valuable assets so the court can sell them and make payments to your creditors. However, states provide asset protections known as exemptions that allow you to keep some basic necessities. If the value of your possessions is less than what the state lets you keep, you don't have to give up anything in your bankruptcy, and that might be a good time to file. If you do have lots of possessions, you can look into Chapter 13 bankruptcy, which generally allows you to keep what you own. The downside of a Chapter 13, however, is that you have to pay your creditors for as long as five years.
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