When should you file bankruptcy?

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Q: I am in over my head with medical bills and credit card payments, struggling to make ends meet each month. I’m several months past due. A friend mentioned that I should maybe consider bankruptcy. Where should I begin?

A: Dear reader,

You have taken a significant step to regain control of your situation by exploring possible solutions. As your friend mentioned, bankruptcy could be the only option for some people. It is worth considering that there may be other actions you could take that are better suited to resolve your financial situation, so bankruptcy should be a last resort used only after allowing yourself to review other options.

With that in mind, a good place to begin is to determine if you have exhausted all of your other options. To make sure you have, talk to a nonprofit credit counselor. They will assess your situation and help you find debt management strategies that you may have overlooked. Bankruptcy may remain as an option, but it is always better to have more than one possible path toward your goal. With the advice of a credit counselor, you will be able to make a more informed decision about what is best for you.

Bankruptcy is a legal process that helps consumers eliminate unsecured debt (such as your credit card and medical debts) or establish a repayment plan for your unsecured and secured debt (such as your mortgage and car loan). Debts, such as child support, student loans, fraudulent charges, or some recent luxurious debts cannot be eliminated. Consumers typically can file bankruptcy under Chapter 7 or Chapter 13.

Under a Chapter 7, consumers can eliminate most of their unsecured debts and keep most of their personal property, including their home and car if their value does not exceed the exemption level indicated by their state. To file you have to meet certain requirements, which include passing the means test, used to determine if you have enough disposable income to repay your debts. Also, there are restrictions if you have previously filed for bankruptcy. To file under Chapter 13, you must have a regular income and comply with a repayment plan that will be established and administered by the court. You will repay all debts, partially or in full, within three-to-five years. You can keep most of your assets, as long as you make your payments through the court. To file under Chapter 13, your unsecured and secured debts have to be below the established limits set by the law, and you have to comply with some restrictions if you’ve filed another bankruptcy in the past. Secured debts are those that are linked to some type of property that you own, such as a car or a home, and can be taken away if you default on the loan. Unsecured debts are those not linked to your property, such as credit cards or medical bills, and if you default the creditor cannot take anything of yours without obtaining a money judgment against you in court.

As you can see, there are benefits from filing bankruptcy; mainly eliminating debt and preventing wage garnishments, foreclosures, and even auto repossessions. So now, ask yourself: are you at risk of having your wages garnished or your home foreclosed? If your answer is “yes,” bankruptcy could stop this. If the answer is “no,” it means that you could still find other debt repayment solutions.

On the downside, bankruptcy can have a serious negative impact on your credit. It can remain on a credit report for ten years, affecting your ability to get new credit in the short term. However, the extent of the damage depends on your specific situation. For instance, if your credit is already in bad shape, the damage will be less considerable and you’ll see your credit improve over time. Also, keep in mind that bankruptcy can be an expensive process because you’ll need to hire an attorney. It is not required, but it is in your best interest to work with a qualified professional. You could get free legal services if you qualify through your local Legal Aid.

Now that you know a bit more about bankruptcy think about what is best for you. I understand that this not only a financial decision, it is also an emotional one. Before you take the step, make sure you are comfortable with it and talk to a nonprofit credit counselor. You don’t have to be alone. There’s help and guidance available, but you must act now.