- There are several indicators that should alarm anyone and if they describe your financial situation, the decision whether to declare bankruptcy could be in your future. If you are only making minimum payments on your debts, you've probably spent too much compared to your income and are at risk of bankruptcy. If you use credit cards to pay for groceries and other necessities because you don't have cash and you're not sure how much you owe, you've probably overspent. If bill collectors are calling you and the thought of sorting out your finances seems intimidating or impossible, you've probably already damaged your credit and could be heading for bankruptcy.
- Bankruptcy works best for those with few assets and little income because creditors can't collect what you don't have. There are laws to prevent the garnishment of wages for low-income earners, and you generally don't go to jail for owing money. If you make at or below your state's median income you can file for Chapter 7 bankruptcy. State laws determine how much of your assets are exempt from liquidation and, for some individuals, this could be most or all of them. Anything in excess of the exemptions is sold by the trustee and used to pay off debts, but any remaining debt is permanently forgiven.
- For all the benefits of bankruptcy, there are some major consequences. Many individuals don't qualify for Chapter 7 bankruptcy and must file for Chapter 13, which allows for the reorganization of debt. If you're upside down on a house or a car, this type of bankruptcy can limit your debt to the current value of the asset or lower your monthly payments, but you still have to pay. Debtors in Chapter 13 have to create a plan to show how they will pay off their debts for up to five years out of their regular disposable income. Of course, your credit score is severely damaged by a bankruptcy, which stays on your report for seven to 10 years, depending on the type. After filing for bankruptcy it will be difficult to get a credit card or any kind of loan. Bankruptcy is also a matter of public record, so you can't necessarily stop employers or other people from learning about it. On top of it all, between mandatory credit counseling and filing fees, not to mention lawyers, it could cost you money to file for bankruptcy.
- Bankruptcy should always be a last resort after everything else has failed. If you recognize the warning signs and take action early enough, you can avoid bankruptcy. Most creditors are willing to negotiate without going to court. While this will damage your credit, it won't have the more severe consequences of a bankruptcy filing. On the other hand, if your credit is already badly damaged or your income is going to rise significantly, there might be reasonable incentive to file. In general, bankruptcy works best for those who owe money but don't have much in the way of valuable assets that could be sold off to pay debts, or those who have reliable income but have lost control of a few larger debts. You can only have one bankruptcy on your credit report at a time, so choose carefully.
