For most people, bankruptcy is a dreaded word that draws up connotations of financial ruin and descent into despondency. There is no denying that declaring bankruptcy is an embarrassing and extremely emotionally draining process. However, when debt becomes insurmountable and a constant worry, taking that option can be a way back to peace of mind and a new start to financial freedom. When you declare bankruptcy, you get temporary or permanent reprieve on most of your existing debts and liabilities. Additionally, contrary to what many people assume, bankruptcy, when managed in right way can save your credit rating and allow you to access credit facilities once again. In this article, we will discuss some red flags and preparations that tell you it is the right time to file for bankruptcy.

1. First understand what bankruptcy relief you are eligible for

The most prominent types of bankruptcy are chapter 7 which removes your legal obligation to clear certain debts, and chapter 13, which gives you temporary reprieve by allowing you to reorganize debt and repayment schedules with lenders. Chapter 13 bankruptcy is preserved for people who have a relatively high income and who do not qualify for chapter 7. Knowing which type of bankruptcy best fits your financial profile helps increase your chances of a favorable determination from the courts. Financial experts recommend chapter 13 bankruptcy for people with secured loans and regular income and wish to protect existing assets. Chapter 7 on the other hand best fits people with unsecured loans and have a hard time finding earnings. According to the American Bankruptcy Institute (ABI), 499,909 individuals filed for chapter 7 bankruptcy in 2016, with 97.7% of them being discharged, while about half of the 331050 chapter 13 bankruptcy cases were discharged.

2. When you have to rely on your credit card for utilities debt servicing

Usually, when you have untenable debt, you will find yourself having to pay for all your home needs with your credit cards. Unless you are waiting for some substantial amount of money to come in in the foreseeable future, this practice will only worsen your debt woes, and it may be time to file for bankruptcy. One sign that you are on your last legs financially is when you find yourself shifting debt from one credit card to another. The interest payments and other fees associated with using credit cards means that using one credit card to pay for another one will only increase your debt.

3. When you find yourself dipping into your savings

If you are using your rainy day fund or retirement savings to repay loans, you should realize that you are digging an even bigger financial hole for yourself. This is an unsustainable way to cope with your debt. If you pull out money from your retirement fund early, you not only jeopardize your old age wellbeing but also remove tax protection on the accrued amount. In most cases, savings are considered protected assets and bankruptcy will keep them from being repossessed by the lender.

4. A second or third job fails to get you out of the red

Trying to beat your debt on a lower income than the debt demands is like trying to fill a swimming pool with a teaspoon. The most rational way to deal with debt is to increase your income level. However, if adding extra income streams fails to make a dent in your debt, then declaring bankruptcy may be the go to solution. As part of a means test done during the bankruptcy procedure, many judges will consider whether the filer has exhausted all potential income sources. Demonstrating a reasonable attempt at increasing your ability to repay will greatly enhance your chances of getting a positive judgment.

5. Do not wait until you are completely broke

The bankruptcy filing process is not always a walk in the park, and you may need legal representation to help you present a solid case. You may need in excess of $2500 in lawyer fees and understandably, few lawyers would be willing to offer you services on credit basis. It might be wise to redirect some of your debt servicing cash towards paying lawyer fees and filing fees. If you wait until your last penny is gone, you might leave yourself defenseless to the whims of debt collectors.

Resources:

1. https://www.moneycrashers.com/when-reasons-why-file-bankruptcy/
2. https://www.nerdwallet.com/blog/finance/bankruptcy-best-option/
3. https://www.nerdwallet.com/blog/finance/bankruptcy/
4. https://www.alllaw.com/articles/nolo/bankruptcy/what-does-bankruptcy-do.html
5. https://www.debt.org/bankruptcy/