When Does It Make Sense To File For Bankruptcy?

Bankruptcy can be a scary word, one we hesitate to speak out loud, much less to act on, but there are times when filing for bankruptcy may be your best financial move. In fact, there are many benefits to filing for bankruptcy. If you are considering filing for bankruptcy, you should take the time to speak to a reliable local bankruptcy lawyer.

Here are 7 specific situations in which you might want to consider filing for bankruptcy:

1. You Are Overwhelmed by Medical Bills

The single most common reason for filing bankruptcy in the US today is overwhelmingly high medical bills. When you can’t afford to pay off your medical debt – bankruptcy may be the right choice for you. Keep in mind, however, that if you are continuing to incur additional medical bills, and you are not being denied care, it might be better to wait before filing. 

Note that Chapter 7 versus Chapter 13 bankruptcies work differently. Under the former, you would eliminate debt, while the latter reorganizes debt and sets up a years-long repayment plan.

2. You Have Excessive Credit Card Debt

Another common reason that many people file for bankruptcy is excessive credit card debt. 

Generally, credit card debt is easier to repay than many other types of debt. Nonetheless, there may be times when you are unable to make even your minimum monthly payments, or your credit cards may be maxed out or exceed your credit limit. Although the credit card may already be canceled by the credit card company, you continue to owe the debt. In such situations, bankruptcy may be a solution.

3. Divorce-related Debts Are Too High to Pay

While bankruptcy can’t always eliminate all types of debt or financial obligations, such as alimony and/or child support, related to many divorce proceedings, it can sometimes help. Legal fees incurred during a divorce, as well as some marital debts may qualify for bankruptcy protection.

4. Your Mortgage Payments are Delinquent and You Want to Keep Your Home

Financial difficulties can result in falling behind on mortgage payments. The danger of losing the equity in your home, or the mortgage company foreclosing on your home, may be looming. It may be possible to get an emergency stay on the foreclosure of your home by filing for bankruptcy protection. In addition, you may be able to save the equity in your home if it is exempt (and it often is under the laws in many states.).

5. You Are Behind on Your Rent

If you rent, you may be able to avoid eviction by filing for bankruptcy protection to either eliminate rent debt, or reorganize debt to catch up on back rent payments.

6. When Your Debt-to-Income Ratio Is “Impossible”

In general, we would not recommend filing for bankruptcy if your current income is sufficient to repay your debts in a reasonable amount of time at affordable monthly payments. In fact, you may be able to renegotiate a loan or consolidate debt in some cases, rather than filing for  bankruptcy.

Unfortunately, when you have zero income or very little income, and are straddled with very high debt, it might be virtually impossible to repay your debts in a reasonable amount of time.  In such a situation, filing for bankruptcy might make sense. Also, there are times when creditors will refuse to renegotiate terms and may even prefer that you file bankruptcy.

7. You Are Nearing Retirement Age in Deep Debt

Finally, it’s worth mentioning that age can be a factor when deciding whether or not to file for bankruptcy. You may be nearing retirement age while deep in debt and unable to pay off that debt. Bankruptcy could give you a chance to start over financially and build up some retirement savings before you actually retire.

These are just a handful of the most common situations where filing for bankruptcy can make sense. There are more, of course, and every individual’s specific situation is different.

Consider contacting an experienced bankruptcy lawyer and get a free, no-obligation initial consultation to help you better understand whether or not filing for bankruptcy would make sense for you.