When should I consider filing for bankruptcy?

Help with your finances

Bankruptcy should be considered as a last resort. It is a difficult decision to make. Here are five (5) helpful pointers to help you understand when you should consider bankruptcy as an option.

  1. Do you have pay more in expenses than you receive in income?

Many times, when individuals are having financial issues, they play “ostrich” by hiding their heads in the sand. This means that you are not opening your mail and you are not answering your phone due to fear of your creditors. This is a perfect time to take a deep breath, start opening your mail, and really understand where you stand financially.

First, make a chart of your income compared to your expenses. For your income, calculate every penny that comes in your door. This should include employment, overtime, tips, bonuses, child support, alimony, food stamps, and any other regular payment. An example of a regular payment that you should include would be if your sister pays your cell phone bill every single month. The money your sister provides on a regular basis should be considered income. Compare that to every expense you have. You should include electricity, cable, phone, internet, water, sewer, trash, gas, pet supplies, monthly payments toward your credit cards, etc. Review your bank statements to confirm where you are spending money. If you pay more in expenses than you receive in income, chances are you are living off of credit cards and/or living beyond your current means. Filing for bankruptcy could improve your situation.

  1. Do you have more in debt (credit cards, medical bills, etc) than you have in assets?

Next, you should make a chart of your debt and compare it to your assets. For your debts, list every person or company that you owe money to. This should include a mortgage, a car loan, credit card companies, medical bills, student loans, taxes, friends, families, attorneys, the handyman, the nanny, etc. Make sure to list the total amounts owed to each person and then calculate the total amount of debts you have. Then, calculate your assets. List everything that you own and how much it is worth. This should include your home, your car, any other motor vehicles, bank accounts, annuities, retirement accounts, stocks, jewelry, electronics, etc. You would be surprised to know how much a used iPhone is worth. Compare your debt to your assets. If your debt outweighs your assets, filing for bankruptcy could improve your situation.

  1. Have you tried resolving your issues with your creditors on your own?

You would be surprised that sometimes a phone call can assist you in resolving your own situation. Try contacting your credit card company to request a lower interest rate on your card. Chances are if you make your payments on time, you may score a lower interest rate, which will reduce your monthly payment. Try negotiating medical bills on your own. Some hospitals and doctors will offer steep discounts for lump sum or cash payments. Many will also take low monthly payments, such as $50/month. Have you looked into whether consolidating student loans would benefit you? You would be surprised how far you can go on your own.

  1. Have you had a temporary issue that caused you to fall behind on your debts?

The purpose of bankruptcy is to either give you a fresh start (under Chapter 7) or help your reorganize your financial situation (under Chapter 13 or Chapter 11). If you have a temporary issue, such as a single medical issue or a temporary loss of your job, bankruptcy may be able to improve your situation. An important consideration is to figure out whether it is likely that your issue will reoccur. For example, if you had a car accident and you broke your leg – that is a single medical issue. While we cannot plan for the future, it is unlikely that a car accident will occur again.

This is different from a person who is on dialysis and is going to the hospital 3 times a week. Until that person receives a transplant, the medical issues will continue to reoccur. If your medical issues will reoccur, bankruptcy may not improve your situation. Filing bankruptcy will cut off your credit cards and will only wipe out the medical bills that exist as of the date you file for bankruptcy. You will have to pay for any medical bills that arise after the date you file for bankruptcy. Once you file for bankruptcy and receive a discharge on your debts, you will not be able to file another bankruptcy for a few years.

  1. Do you have an emergency situation that requires a bankruptcy filing immediately?

There are some situations that could be considered an emergency for purposes of filing bankruptcy. If you are about to lose your home to foreclosure, if your car is going to be repossessed, if a creditor is about to put a lien on your property, or if a creditor is about to garnish your wages or seize a bank account, filing bankruptcy could stop these actions. Filing bankruptcy could actually “freeze” these creditor actions and provide some immediate relief. Your personal situation, however, will determine what will happen in the long run for these creditors.

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