When Should You File for Bankruptcy?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 November 2019
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Filing for bankruptcy may seem like a scary, or even shameful, proposition. In fact, it is an increasingly commonplace action in a world that sometimes seems to encourage people to live in debt through credit cards and loans. Deciding whether or not to file for bankruptcy requires a careful assessment that takes into consideration financial, personal, and legal factors. If a debt situation seems to be out of control, it is important to do this assessment quickly and thoroughly, since waiting too long to file for bankruptcy may be just as damaging as filing without proper preparation.

One way to determine whether to file for bankruptcy is to contact a credit counselor or bankruptcy attorney. These professionals typically have a clear understanding of the laws and will be able to tell clients what their financial situation will be like after filing for bankruptcy. It is important to bring a counselor or attorney all financial statements and records of all debts and assets. This allows them to accurately assess the situation and recommend a course.


It is important to learn exactly what will happen if a person decides to file for bankruptcy, rather than letting it sit as a nebulous fear. Depending on laws and personal situation, bankruptcy generally results in the loss of assets, such as cash, certain bank accounts, and personal property, in return for the discharge of debt. For people who own a lot of property or have many liquid assets, this may be a serious concern, while for those with little property and few assets, this may not result in a huge loss. Additionally, bankruptcy damages credit for about ten years, meaning it may be more difficult, though not impossible, to buy a home or make other credit-related purchases.

Another important factor in determining whether to file for bankruptcy is what type of debt is currently held. Medical bills, credit card, and private loan debt are often discharged by bankruptcy, while student loan debt is generally exempt. For former students with a high level of loan debt, bankruptcy may not be a viable option and could significantly worsen a financial situation.

According to some experts, there is no set point to determine whether or not a person should file for bankruptcy. Some analysts suggest that a good benchmark is the inability to pay off current debts within five years, without plundering bankruptcy-protected accounts, such as retirement funds. This serves only as a guideline, however, since personal finances, the amount and type of debt, and personal level of anxiety may all affect the benefits of bankruptcy.



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