When It's Time to Wave the White Flag and File Bankruptcy

Sometimes, despite our best intentions to pay back our debts, our individual circumstances make it an impossible task. Bankruptcy can occur in two different ways – the most common is when an individual or business voluntarily files for bankruptcy. The other potential route to going bankrupt is when your creditors ask the court to order you bankrupt after excessive nonpayment.

If you feel like your one step away from waving the white flag and going completely under, how do you know when it's time to give in and file for bankruptcy? If you're in the danger zone, here are some questions you should ask yourself and answer honestly in order to accurately assess your situation:

• Are you struggling to make just the minimum payment on your credit cards each month?
  
  
• Do you often skip bill payments in order to buy more immediate needs, like groceries or the heat bill?
  
  
• Do bill collectors call you regularly?
  
  
• Do you feel out of control or scared when you think about your financial situation?
  
  
• Are you frequently using credit cards to pay for living expenses (rent, mortgage, electric, groceries, etc)
  
  
• Have you tried debt consolidation but can't get approved for the loan?
  
  
• Are you unsure how much money you actually owe?
  
  

Assessing Your Financial Circumstances and Taking Inventory

Did you answer “yes” to three or more of the above questions? Chances are, you're in a financial situation that requires careful consideration, and more than three would indicate you may be headed for bankruptcy. Going bankrupt means you owe more money than you can afford to pay back.

Write down all of your liquid assets including stocks, bonds, real estate, retirement funds, college savings, vehicles and non-bank account money. Get a rough estimate for each item. These are your total assets.

Write down all of your debts. If the value of your assets is less than the amount of debt you owe, bankruptcy may be an opportunity to get out of a bad financial situation, but should be used as your absolute last resort. Declaring bankruptcy isn't easy, and steps should be taken to avoid it if at all possible.



Waving the White Flag: How do I Declare Bankruptcy?

If you can't pay your debt, if you can't get a consolidation loan, and if you've already attempted a debt management company or settlement options – and you've decided bankruptcy is the only solution to your financial situation, it's probably time to consult a lawyer. A lawyer can help you determine which method to file for bankruptcy that will best match your unique situation, as there are pros and cons with each bankruptcy option available.

Chapter 7 Bankruptcy

People commonly file for bankruptcy, Chapter 7 due to unemployment, excessive medical expenses, using too much credit, and marital problems. Chapter 7 is the type of bankruptcy most people think of when they are considering bankruptcy and it liquidates the assets you have in order to pay off as much of what you owe as possible. Your assets are sold and given to your creditors.

Four months after filing you get a notice of discharge and your credit report will show you filed bankruptcy for 10 years. In some cases, people are able to buy homes or vehicles even with a bankruptcy on their record, but it sure does make it more difficult to obtain credit. Filing Chapter 7 does offer a way to start over, however, and may be your best option.

If you own a home or a business... or any personal assets you couldn't bare to part with though, Chapter 7 may not be the fresh start you were hoping for.

Chapter 13 Bankruptcy

The other option for filing bankruptcy is a Chapter 13, also known as reorganization bankruptcy. Chapter 13 reorganizes the money you owe so that you can pay it off within three to five years. If you have predictable income, Chapter 13 gives you a “grace period” to repay and at the end of the designated three to five years, any remaining debt is discharged. If you own a home or other property or assets, a Chapter 13 makes it possible to keep the assets.

If your Chapter 13 bankruptcy is approved by the court, your creditors must stop contacting you while you pay off the debt. You do not have to liquidate your assets.

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