Filing for bankruptcy is a decision that can carry heavy, if only short-term, consequences. Though filing for bankruptcy is becoming more common in this Whac-A-Mole economy, it’s still a stressful and emotional decision.
Here are a few signs that you should – or should not – file for bankruptcy.
File for bankruptcy if:
You’re about to lose your home
If you’ve fallen far enough behind on your mortgage payments that you’re in danger of foreclosure, you should consider Chapter 13 bankruptcy seriously. Doing so will prevent the looming possibility of being locked out of your house. Filing for bankruptcy will buy you five years to get caught up on your mortgage.
You can pass a “means test”
A means test is a calculation that compares your income to the median income for comparable people in your area. If the means test shows you earn less than the median, you qualify for Chapter 7 bankruptcy. If you earn more, you don’t.
Your debt is mainly “unsecured”
Unsecured debt includes credit cards, outstanding medical bills and personal loans. This kind of debt can be relieved by Chapter 7 bankruptcy. Be aware that filing for Chapter 7 doesn’t help with “secured” debt, including a mortgage, car loans, back taxes, spousal and child support or student loans. These forms of debt can be relieved through other means, namely Chapter 13 bankruptcy.
Don’t file for bankruptcy if:
You can’t handle the short-term hit to your credit score
Filing for bankruptcy will make it difficult or impossible to do things like buying a car/house or start a business. Chapter 7 bankruptcy hurts your credit score for 10 years, while Chapter 13 lasts for seven years.
You own valuable antiques and luxury items
One of the first tasks in filing for Chapter 7 bankruptcy is compiling a complete list of your property and possessions. The courts aren’t sympathetic to people filing for bankruptcy while they still own multiple cars, boats, jewelry and similar non-essential property. Here is California’s bankruptcy property exemptions list.
You have underlying spending problems
A pattern of out-of-control spending is not going to help your bankruptcy case. But more importantly, filing for bankruptcy will only be a temporary fix if you can’t control your spending. You’ll only find yourself back in bankruptcy court, or worse, in a couple of years.
Seek counseling to get those urges under control. If necessary, you can do this in conjunction with your bankruptcy proceedings.
Whatever your situation, the bankruptcy process can be significantly eased by seeking professional help. Consult an attorney to find the right course of action.