When Does Filing for Bankruptcy Protection Make the Most Sense?

To say there is considerable stigma attached to a bankruptcy filing is to indulge in abject understatement. People are supposed to pay their debts—period, full stop. This cultural more is ingrained in us seemingly from birth.

And, for good reason too. 

The economy would slam into a brick wall were we all to stop paying our debts. However, there are times when doing so simply isn’t feasible. And, while yes, there are a number of other effective debt relief options, it’s still useful to ask; when does filing for bankruptcy protection make the most sense?

What Bankruptcy Protection Does

Many types of debt can be erased, which gives you an opportunity to start over again—ideally having learned from previous mistakes. Foreclosure, repossessions and wage garnishment can all be put to a halt with a bankruptcy filing. Creditors who claim you owe more than you actually do can be put in check.

Debt collectors must stop contacting you and repossessions can be reversed under a bankruptcy filing. 

What Bankruptcy Protection Does Not Do

While debts owed to secured creditors can be discharged, the property pledged as collateral will be forfeited—unless you work out a payment plan with the creditor in question. 

Child support, alimony, public student loans, court-ordered restitution, judicial fines and certain types of taxes are immune from a bankruptcy filing. Cosigners are not protected under a bankruptcy filing. They do have the right to take over the debt and satisfy it, but they won’t get relief from the debt f you file for protection. 

Debts incurred post filing will not be covered within the filing. 

Chapter 7 vs Chapter 13 Filings

Under Chapter 7, debtors can eliminate all but the forms of debt listed above, but must forfeit all property except that deemed exempt by the courts. 

Exempt property is that which is deemed invulnerable by the courts, unless pledged as collateral. In most cases, this includes everything from clothes to household items and the like. 

Under a Chapter 13 filing, debtors are required to work out repayment plans with creditors, within which debts are settled within three to five years. In exchange, they get to keep all properties.

There Are Other Options

Rather than jumping straight to a bankruptcy filing when repaying debts become difficult, it’s useful to look at as many different debt relief solutions as possible. Perhaps your problem can be solved thorough credit counseling, debt management, consolidation, or settlement. 

The first three options can even help you preserve your credit rating. Settlement, less so, but when it comes to debt settlement vs bankruptcy, your score will likely recover much more quickly with settlement. 

When to File

The first step toward making this decision is being clear about what your goals are in this regard. Are you trying to save your house and/or your car? Are you burdened with an insurmountable medical debt? Have you tried credit counseling, debt management, consolidation, or settlement? 

Do you have retirement savings you need to preserve? Has a series of cascading events rendered your ability to meet your financial obligations impotent? Have you tried everything possible to work out an agreement with your creditors, to no avail? 

Timing is Critical

These are a few of the situations in which filing for bankruptcy protection might be your best option. Within that though, there are some timing issues to consider as well. You must file for protection before foreclosure proceedings are instituted if you’re trying to save your home. If you’ve hade a period of extremely high income, then lost the job, it’s better to wait until your average monthly income better reflects your current status. 

These are but a few of the times when filing for bankruptcy protection makes sense. Again, the main thing to consider is what your desired outcome might be. And, while using the bankruptcy code for your protection is indeed frowned upon by society in general, it’s important to remember, you’re the one who has to live your life. The thoughts and opinions of others have no relevance. 

You must do what is right for you—and there’s no shame in that.