When Should a Person File for Bankruptcy?

The answer to this question largely depends on the individual’s circumstances. Bankruptcy should only be used as a last resort, and it might damage your credit for years.

Generally, people file bankruptcy because they can’t afford to pay their debts. There’s no minimum amount of debt to file bankruptcy, but you must pass your state’s means test.

1. If you’re behind on your mortgage or car payments

Most financial advisers recommend bankruptcy only as a last resort, when debt relief options have failed. Regardless, filing for Chapter 7 is a major decision with consequences that can affect your credit for years.

If you are behind on your mortgage or car payments, it may be time to file for bankruptcy. This will allow you to catch up on the missed payments without losing your home or vehicle. If you are able to keep the collateral, the creditors will likely allow you to “reaffirm” your debt and continue making payments. However, this should be done with the help of a skilled bankruptcy attorney. It’s often best to explore other debt relief options first, like negotiating with the creditor. These can include reducing expenses, increasing income or debt settlements.

2. If you’re behind on taxes

If you have unsecured debts, filing for bankruptcy can be beneficial. This includes credit card debt and cash advance (payday) loans. Filing for Chapter 7 bankruptcy can also help protect you from wage garnishment, foreclosure, and car repossession.

However, not everyone qualifies for this type of bankruptcy. The court looks at a person’s disposable income to determine if they can afford to pay back their debts in three or five years. Some types of debts cannot be discharged, such as child and spousal support obligations, most tax debts, and court restitution orders or criminal fines.

It’s also important to remember that bankruptcy will have a long-term impact on your credit. That’s why it’s critical to consider all your options before deciding on the right type of bankruptcy for you.

3. If you’re behind on child support or alimony

Although the bankruptcy code prioritizes debts to ensure that some kinds of claims get paid first if there aren’t enough resources to pay all creditors’ claims, domestic support obligations (such as child or spousal support) cannot be eliminated by a discharge. This is because society has a strong interest in ensuring that delinquent parents continue to make their payments so that children and families don’t have to

rely on public assistance.

However, Chapter 13 bankruptcy allows you to cure your past-due child or spousal support arrears through a repayment plan. It’s important to consider other types of debt relief, too, because those processes can often help you manage your family support obligations and still receive the fresh start that a bankruptcy filing provides. Debt relief can also sometimes save you money by lowering your interest rates, eliminating some debts or giving you longer to repay the remaining amount.

4. If you’re behind on rent or mortgage payments

If you owe money to your landlord or are facing foreclosure, bankruptcy may be worth considering. However, it’s important to understand that bankruptcy will be public record and could impact your ability to find housing or work in certain industries (particularly if employers conduct background checks).

Back rent is treated like other unsecured debt in bankruptcy, meaning it may be dischargeable. It’s also important to note that the bankruptcy process can take some time, and the filing will affect your credit score.

Before filing, it’s a good idea to consult a debt counselor and create a budget. This will help you get a better picture of your finances and determine whether or not bankruptcy is right for you. If it’s not, you can look into other less severe debt relief options.

5. If you’re behind on other bills

Bankruptcy is a serious step that can have lasting consequences on your credit score. For this reason, it is generally best to try to catch up on debts like rent or car payments before filing for bankruptcy.

Generally, Chapter 7 eliminates most or all unsecured debt (like credit cards), stops a foreclosure or repossession, and allows the debtor to keep their house and car. However, it may also liquidate some assets that are not exempt.

It is important to talk to a qualified attorney before filing for bankruptcy. Fly-by-night bankruptcy filers can take your money in exchange for a form petition, but they cannot offer sound legal advice. Bankruptcy is a complicated process that requires a detailed understanding of your financial situation. It is not a solution for everyone. A bankruptcy attorney in Harrisburg, PA can help you with the right decision with factual information.