Experts: How To Know When It’s Time To File for Bankruptcy

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Bankruptcy. It’s a word that evokes dread in many Americans. Why? Because it may feel like the end of the road, the last resort, the end, in a way, of the game of debt.

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But how does one know it’s time to file for bankruptcy? What happens when you file for bankruptcy and how does it impact your overall financial picture and existing assets? And finally, how can you rebound financially after filing? 

GOBankingRates consulted experts to get a full understanding of the big picture of filing for bankruptcy in terms of when to do it, how it affects your finances and how you can recover. 

When To File for Bankruptcy: The Telltale Signs

Filing for bankruptcy is a monumental decision that should be considered only when you’re in dire straits and you have no other way out of debt.

“[Bankruptcy] should only be considered after many other options have been considered, including debt consolidation or negotiating with creditors,” said Meredith Lepore, editor of Credello.

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She said these are the deciding factors for bankruptcy filings: you have no assets or income, you owe money you cannot pay, you are being harassed by creditors, you are facing foreclosure or property repossession, you have too much high-interest credit card debt or medical bills or you have gone through divorce or suffered a serious illness.

Keep in mind that you should have a goal when you’re filing for bankruptcy.

“Bankruptcy should be considered as a way to control your debt and keep creditors off your back,” Lepore said.  

How Bankruptcy Affects Your Financial Status and Assets   

Bankruptcy is scary for a reason. It hurts your credit score — but it’s important to note that any damage bankruptcy does to you is more like icing on an already damaged cake. You’ve already incurred harm by being in long-term debt and collections. 

“Filing bankruptcy will cause your credit score to decrease in the short term and can raise interest rates on car loans and other types of credit,” said Keith Rucinski, CPA, JD, at Chapter 13 Trustee in Akron, Ohio. “However, the damage to your credit score and credit history is done long before you file for bankruptcy. Creditors have already reported delinquent accounts to the credit bureaus.”

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A Bankruptcy Lawyer Can Help 

You are afforded some protection, though, via certain U.S. laws that a bankruptcy attorney can walk you through. 

“Bankruptcy laws include federal and state laws on exemptions,” Rucinski said. “These exemptions can protect your assets from legal actions by creditors. These laws can help protect your home, car, wages and retirement funds. U.S. bankruptcy laws are designed to help honest people who are having financial difficulties obtain a fresh financial start. 

“An experienced bankruptcy attorney can help you determine what exemptions are available in your state to protect your assets. Chapter 13 is a bankruptcy option to help people retain their assets and make up missed payments to creditors over a three- to five-year time period.”

Getting Back on Your Feet 

Once you file for bankruptcy, you may be feeling ensconced in doom and gloom. Take a deep breath and remember that there is a road to rebuilding your credit score and financial health. Follow these steps: 

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There is light at the end of the tunnel, though it will take some time — typically about 18 to 24 months — to build back your credit, Lepore said.  

You Are Not Alone 

Though surely not the most popular thing to do, filing for bankruptcy is not exactly rare, either. According to statistics from the Administrative Office of the U.S. Courts, there were 383,810 annual bankruptcy filings in September 2022 — down from 434,540 cases in 2021. This should give people some comfort in knowing that, if they’re filing for bankruptcy, they’re far from alone. 

Additionally, consumers should know that it is not fancy cars and lavish mansions driving bankruptcy filings in America; it’s actually hospital bills. According to a recent study from Debt Hammer, medical debt is the No. 1 cause of bankruptcy.

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