If you’re wondering if bankruptcy is right for you, you may be in a situation where you’re in a great deal of debt and believe you do not have many options. You may have lost your job or had a medical emergency that put you in a deep financial hole. Debt collectors constantly calling and sending letters, and seeing your credit score drop more than a hundred points, can take a toll on anyone.

Now you find yourself in a constant state of worry because you feel as if your world is coming apart. There are many clever and profound quotes out there on why we should not worry, but easier said than done. Whether you’re religious or not, the Serenity Prayer written by the theologian Reinhold Niebuhr reads, “God, grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.” If you’re consumed with worrying about your financial matters and bankruptcy comes to mind, these factors can help you decide if it’s right for you.

Before we go over the factors that you should consider to see if bankruptcy is right for you, let’s first go over what bankruptcy is. Investopedia.com simply defines bankruptcy as “a legal proceeding carried out to allow individuals or businesses freedom from their debts, while simultaneously providing creditors an opportunity for repayment.” It is a legal way for those who are facing financial hardship and owe a considerable amount of debt to restructure or have their debt forgiven. It will give creditors an opportunity to recover some, if any, of the money they lent, and it will give debtors an opportunity to start over. Starting over is not without its consequences. You may see your credit score improve drastically, but you are not starting over with a blank slate. Depending on the type of bankruptcy you file–here’s a list of common types of bankruptcy: https://fiyumoney.com/bankruptcy-the-different-types/–you will not be able to file for bankruptcy for several years. You will also have it as a derogatory mark on your credit report for some years that could impact borrowing in the future. However long the type of bankruptcy you file stays on your credit, it will be visible to all creditors and others who check your credit. This can be a major factor in their decision to grant new credit even if your credit score is fair or good.

Here are some factors to help you determine if bankruptcy is right for you. The list is not ordered in any particular manner because everyone’s particular situation is different.

  1. Consider The Amount Of Debt

There are many factors to think about when contemplating bankruptcy; one of the major factors is the amount of debt you owe. If you’re drowning in debt and see no hope of getting ahead, you might want to consider bankruptcy. You may be wondering what a tangible measure of “drowning” is when it comes to the debt you owe. NerdWallet contributors Liz Weston and Tiffany Curtis suggest that if the debt amount that can be wiped away by a bankruptcy judgment is more than half your income or will take five or more years to pay off, you may want to consider bankruptcy.

  1. Consider The Type Of Debt

If you’re drowning in debt and you’re thinking about bankruptcy, it is important to consider the type of debt you owe. Whether a portion or all of your debt is secured or unsecured will be a major determinant in your decision to file bankruptcy and how the proceeding will be carried out. Mortgages, car notes, and loans that have collateral are examples of secured debt. If a person chooses to erase the debt they owe on their mortgage, vehicle, or a collateral loan through a bankruptcy proceeding, they must also relinquish the item or items. You can choose to affirm the debt, which means continued ownership. A person may choose to do this due to the necessity the collateral item plays in their life. It would be unwise to relinquish your home and car if you need a place to live and transportation to get to and from work and other places of necessity.

Keep in mind that not all debt is eligible for erasure. This is another factor why considering the type of debt is important. If all of your debt is child support, it is unlikely to have it erased through bankruptcy. Alimony, fines and penalties, student loans, and fraudulent debt are some examples of non-dischargeable debts. Remember, there are exceptions to every rule. Your unique circumstance may make you eligible to have your non-dischargeable debt discharged. For example, there are cases where student loan debt is allowed to be discharged under bankruptcy based on the individual’s specific circumstances. Before dismissing your eligibility for discharge under any of these non-dischargeable debts, speak to several professionals about your particular situation. You may be an exception to the rule.

  1. Consider Your Income/Expenses

We’ve mentioned that if your debt is more than half of your income, you may want to consider bankruptcy. You must also factor in the stability of your income. If you are at risk of being unemployed or see your income drastically decrease, this may put you in a deeper financial hole, which will greatly encourage your decision to file bankruptcy. On the other, hand you may find yourself in a position to earn more money, which will make your debt more manageable and quicken the time it will take to pay off your debt. 

Also, your monthly expense is an area that you can explore. Examining your monthly expenses could provide discovery of items that are not essential. You can eliminate these items, which will leave you with more disposable income. You may discover subscriptions and other forms of expenses that you are not utilizing. Eliminate them so you can have more income in your pocket. Also, some individuals are able to make deep temporary cuts to their expenses in order to pay off debt faster. If you have evaluated your expenses and notice that it does not make a significant difference in the time it will take to pay off your debt, you may want to consider bankruptcy.

  1. Consider The Type Of Bankruptcy

There are many different chapters within the bankruptcy code, and the one you choose will be based on your eligibility and your personal circumstances. Chapters 7, 11, and 13 are common, but there are also Chapter 9, Chapter 12, and Chapter 15. The chapters of bankruptcies apply to the different types of filers and circumstances. For example, Chapter 12 is for family farmers and fishermen. Chapter 15 recognizes bankruptcy filed in a foreign country. Chapter 7 is a liquidation bankruptcy for individuals, and Chapter 11 is restructuring of debts–usually applies to businesses and individuals. Speaking to a bankruptcy attorney and a financial advisor will guide you through the appropriate type of bankruptcy that applies to your individual circumstance. 

  1. Consider Your Assets

Bankruptcy is a legal filing, and your personal assets can play a crucial role in the procedure. Now, if you have little to no assets, this is one consideration you can skip, but if you have a considerable amount of assets, it may determine your ability to even file. A court may determine that the liquidation of your assets may be enough to repay your debt. Also, there are certain asset classes that are exempt, such as your primary residence and other personal assets. The list of exempt assets is determined by your state. You should consider examining the list of the state that you reside in. You should consider your own personal assets and how a bankruptcy filing can affect them.

  1. Consider Alternative Solutions

Have you considered other solutions to alleviate your financial hardship? Bankruptcy is usually the last option after a person has considered many other options. One option a person should consider before filing for bankruptcy is contacting their creditors and explaining their financial situation. Depending on your financial situation, you may be able to receive a grace period to make payments without the consequence of fees and penalties. Also, you may be able to have fees and penalties waived in order to not fall further behind in payments. Lowering or a temporary freeze of interest rates on debt may be granted to help you catch up on payments. A payment plan may also be offered. The payment plan may be at a reduced amount to help you catch up with payments without further or more consequences. Creditors would rather have their money late than not at all.

If you haven’t done any damage to your credit–and it’s the beginning of your financial hardship–you may be able to take advantage of a zero percent credit card. Zero percent credit cards give you the ability to transfer your current debt to the card and pay it down during the promotional period. Here is a warning for using zero percent credit cards to pay down your debt. Be mindful not to accumulate more debt with the card that was previously used. It might be a good idea to destroy the previous card so you don’t accumulate more debt. You may think you’re only going to make some minor payments on the card that is now free, but this is how you find yourself in deeper trouble than you once were in. Be very careful when using a zero percent credit card to pay down debt.

Seeking financial assistance may be an option you want to consider before considering bankruptcy. For example, visiting your local food pantry can relieve the financial burden of the cost of groceries. This will free up your spending, which can help you catch up on payments or pay off debt faster. There are government and private programs and agencies available in your location that are available for those that are facing financial hardship. A program may be available that meets your particular situation that can help you avoid the option of bankruptcy. Seek them out before you decide bankruptcy is an option.

  1. Consider The Impact On Relationships

In an ideal world, actions do not have consequences, and our financial decisions do not impact anyone but ourselves. In reality, however, we know this is not the case. Our financial decisions affect our spouses, business and romantic partners, children, other members of our family, and even friends. Consider how the decision to file or not file may impact these relationships positively and negatively. There are pros and cons in every decision. Make sure the pros outweigh the cons in the decision to file or not. For example, in Chapter 7 bankruptcy, cosigners are still on the hook for the debt even if a judgment erases the debt for the primary debtor. Creditors can still go after the cosigner for the debt. If the cosigner is a friend or a partner, this will definitely put strain on the relationship if a person chooses to file. Take the time to consider how choosing or not choosing to file may impact your relationships because it could destroy them.

  1. Consider Your Future Financial Plans/Major Purchases

Bankruptcy is not a get-out-of-jail-free card. There are consequences based on the type of bankruptcy you file. Such consequences are not being able to file for bankruptcy again for a certain time or the impact it will have on future purchases. Filing bankruptcy may be a setback in your future financial plan, and it may be a positive step in helping you meet your financial goals. Whatever the case may be, take careful consideration of how possibly filing or not may impact your future financial plans. Plans such as purchasing a new house or even retirement may be impacted by bankruptcy negatively. Be aware of this.

  1. Consider Career Impact

Bankruptcy does not affect your current employment, and there are laws that prevent employees from denying employment, promotions, or other benefits based on a bankruptcy judgment. Keep in mind that bankruptcy is public record and can be accessed during a credit check or a background check. By law an employer can not deny employment based on bankruptcy, but it is difficult to say what impact seeing bankruptcy on a person’s record will have on the decision process of hiring a person. Certain positions that require security clearance or the management of money may be impacted by a bankruptcy judgment. Keep this in mind.

  1. Consider Social Stigma

What people think should play the least factor in your decision to file or not file for bankruptcy. With that said, our family’s, friends’, and those we care about’s opinions play a major role in our identity. You could be considered the one that is good with money in your friend group, and filing for bankruptcy will destroy that image of you. On the other hand, you could be considered the one that is bad with money in your family, and filing for bankruptcy will further solidify that identity. This can create a feeling of shame that will further make a complicated decision harder. It is important to know and tell yourself that bankruptcy is not a shameful act that is correlated to your self-worth. It is a legal action that is available for those that need it. Many different people from different backgrounds and socioeconomic situations have filed bankruptcy in the past and will also do so in the future. Your decision to file bankruptcy should be based on whether it is the right legal decision for your financial situation and not the stigma it holds in society.

  1. Consider How Did You Get Here

Whether you decide to file bankruptcy or not, it is important to consider what actions or circumstances brought you to a point where you are considering bankruptcy as an option. It could be medical issues that are out of your control or the loss of employment and the inability to find new employment before falling behind in bills. It could also be using credit cards irresponsibly to sustain a lifestyle you can not afford. Whatever the case might be, it is important to examine the factors that lead to financial hardship. Doing this will ensure that if bankruptcy is an option, you will be able to create safeguards to prevent a similar situation. Life is full of risk; some are unavoidable, and others are preventable. It’s up to you to do whatever you can to mitigate as many risks as possible.

  1. Seeking A Consultation With Professionals

Bankruptcy is a complicated and emotional process. Before deciding to file or not file, speak to several professionals. One of the professionals should be a financial planner/advisor, and another should be a bankruptcy attorney. They will provide you with information that is related to your personal situation that will determine if bankruptcy is the right decision. Also, having a bankruptcy attorney file on your behalf will ensure the procedure is done properly. Trying to file on your own can be overwhelming and lead to a denial of a judgment in your favor due to errors. If you do decide to file and you utilize the help of an attorney, be mindful of the lawyer fee and the court fee that you must be able to provide. If you’re going through financial hardship, it may take you some time to come up with the money to proceed. Keep this in mind.

Final Thought

If you are considering bankruptcy, it could mean that you are facing some rocky financial situation. The factors provided above will help you decide if bankruptcy is the right decision for your financial circumstances. When it comes to facing financial challenges, it is paramount to be proactive and not dismiss the challenges you are facing. Financial hardship does not just impact you but also your family and those who depend on you financially. The decision to file is a hard and complicated decision, and the social stigma surrounding bankruptcy can make that decision even more difficult. Don’t let social stigma be a deciding factor in your decision. Seek advice from a financial advisor/planner and a bankruptcy attorney before you decide. If you do decide, make sure you consider the financial cost of filling. Lawyer fees and court fees may be hard to come by when you’re already strapped for cash. Keep this in mind. Bankruptcy is not the end of the world. It can be the path to financial recovery. It can also be the decision that helps you meet your future financial goals.