Young business owner at desk under stress. Concept: File for bankruptcy
James Njau
By: jnjau
Read in 10 minutes

When Should You File for Bankruptcy?

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The most likely answer you will get from anyone when asking about whether or not to file for bankruptcy is “probably as a last resort.” Is that true? Should file only when all other alternatives have failed? In this article, we’ll help you weigh in on your options, but first, you should get a deep understanding of what bankruptcy is and the most common types of bankruptcy.

Once you understand what bankruptcy really is and the process it involves, keep in mind that bankruptcy goes beyond the financial aspect. You may go through stigmatization, which is like a virtual scar that hangs around your shadow for a long time in your life. If you want to handle this scar sooner than later, we recommend you to look for a good lawyer and file for bankruptcy.

Know if it is Time to File for Bankruptcy

Before you file for bankruptcy, please be aware of the many effects that may ruin your reputation for a long time. Make sure you make consideration of possible alternatives. You should also be able to answer the following questions to help you make your final decision on whether to file or not.

Are debt collectors on your neck?

Failing to make payments to your creditors may land you in the hands of some debt collection agency. When you receive calls come from collection agency offices and you don’t respond, before you know it they may file a lawsuit forcing you to pay up.

It may not be prudent to fight a debt lawsuit because upon losing the case, you may incur more costs in the name of attorney fees and the trial costs. However, filing for bankruptcy offers legal protection and time to re-organize yourself. The implication here is that until the case is over, no one can come to claim your money.

Are you using one credit card to pay for essentials?

The decision to ease your debts by using one credit card to pay for everything will not make your debt go down. You can only do that if you have a temporary cash flow problem. But if you are using a credit card on a regular basis to pay even for the essentials, the truth is your debt will only keep increasing. The scenario can only worsen over time: keep in mind that your debt will keep rising due to interest charges.

Have you considered debt consolidation and this doesn’t seem enough?

Before you file for bankruptcy, consider the option of debt consolidation: this alternative gives you the opportunity to combine all the debts you owe in one single account that you can pay on monthly installments. Consolidating loans help you pay off old loans but here is the deal: it only works if you find a lender with the best rates.

Picking the right strategy to debt consolidation will save you hundreds or thousands of dollars in the long run; however, if you have already tried and your debt still seems massive, it may be time to file for bankruptcy.

Are you sure about how much you owe, and the amount is overwhelming?

You need to know your financial strength in relation to the debts you owe. In other words, do the proper math to find out if you owe more than you can pay. When summing up your assets, make sure to include the value of stocks, real estate, vehicles, and any other savings in and out of banks.

The next step is to add up all the bills you owe, including your credit card bills. Compare this figure against the assets you have. If the difference is still overwhelming and you think is not possible to pay the amount any time soon, it may be time to file for bankruptcy.

Have you tried negotiating with lenders and negotiations have failed?

Creditors also find it practical to reduce your debts rather than going through the long process of suing for bankruptcy. When they realize they are not receiving any repayment, they may be willing to negotiate a settlement.

Will you benefit if you file for bankruptcy?

Getting a straight answer to this question is not easy due to the many factors involved in the bankruptcy process. First, you need to look at how long it will take you to repay your debts. If the period seems too long, then it may be a good option to file for bankruptcy.

Are working on a side job to help with debts?

To offset your debts, you need additional income. That’s easier said than done: having two jobs it’s hard and overwhelming. It can drench you physically and emotionally. Think carefully if the easiest way out of such a situation is to declare bankruptcy.

Quickly go over the questions above. Is your answer “YES” to most of them? It that’s the case, filing for bankruptcy seems like a reasonable option.

Other Tips to Know When You Should File for Bankruptcy

When you realize that you cannot repay all the debts without any help, filing for bankruptcy can offer you a way out. Keep in mind that the government has put in place laws to protect both the creditors and you.

You stand to benefit from bankruptcy reminding the following:

  • Rule of the thumb- If you see yourself unable to make repayments within the next five years, now it may be the best time to declare bankruptcy.
  • Consider filing for bankruptcy as a last resort Only file when you are sure other possible alternatives cannot relieve you of the current debts. In this article, you can find some alternative ways you can use to pay off debt when every other approach fails you.

Other than the two points we have given, you can also file for bankruptcy when in one or more of these situations:

  • You become sick and you are not able to generate any money to settle your debts. Maybe you are no longer working or have an illness that hinders you from generating enough money to repay your creditors.
  • You are not capable of handling the necessities without using cards, and still, you are not able to settle your debts.
  • You are in the middle of divorce proceedings, and you want to reduce the attorney and court costs. Filing for bankruptcy will help discharge joint debts and protect your property.
  • Creditors are suing you for debts, and you keep getting endless reminders about repayments. Failure to heed to the summons may lead to a default judgment against you. Therefore, it is good to be responsive and file for bankruptcy to protect your assets and savings. Filing for bankruptcy means no judgment can proceed against you.
  • You are in danger of losing your home while at the same time struggling to keep up with debts. If a foreclosure seems to be in your near future, you need to seek the kind of legal protection that bankruptcy offers you.
  • When the only option you have to pay off debt seems to be withdrawing money from your retirement account (401(k) account). Remember that funds from a 401(k) account should be only used for their original purpose: your future wellbeing after retirement. Also, early withdrawals from a 401(k) involve a tax penalty that will only add up to the piling debts. By filing for bankruptcy you’ll avoid pulling money from your retirement account.

To sum up, you should carefully evaluate the pros and cons of bankruptcy, as well as its consequences, before making your final decision. Did you know that filing for bankruptcy would remain in your credit history for more than seven years? Also, don’t forget the emotional stress involved in the bankruptcy process.

However, bankruptcy also provides you with a debt-free, fresh start and hope for your financial future.

If you want to receive more tips to better manage your finances, subscribe to the Camino Financial Newsletter. Join a community of entrepreneurs like you to receive the latest trends on small business, resources, and tools to grow your business and succeed.

 

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