When To Declare Bankruptcy

If you're overwhelmed by your debts, bankruptcy is just one option.

If you have large debts that you can’t repay, are behind in your mortgage payments and in danger of foreclosure, are being harassed by bill collectors—or all of the above—declaring bankruptcy might be your answer. Or it might not be.

Bankruptcy can, in some cases, reduce or eliminate your debts, save your home and keep those bill collectors at bay, but it also has serious consequences, including long-term damage to your credit score. That, in turn, can hamper your ability to borrow in the future, raise the rates you pay for insurance, and even make it difficult to get a job.

Highlights

Filing for bankruptcy is one way to get out from under a crushing debt load, but it has negative consequences that can last for years.
The two common types of personal bankruptcy—Chapter 7 and Chapter 13—will stay on your credit record for 10 years and seven years, respectively.
Before filing for bankruptcy, it's worth contacting your creditors to see if they are willing to negotiate. Many lenders, for example, have programs for people who are having trouble paying their mortgage.

When to declare bankruptcy: 8 questions to ask yourself

What to ask yourself before you file for bankruptcy

Most people take their financial obligations seriously and want to pay their debts in full, but knowing when to file bankruptcy and when to negotiate or use another strategy can help put you on the road to financial health.

Here is a list of questions that can help you assess your financial health and give you insight into whether bankruptcy may be right for you. You should also discuss these questions with an attorney.

1. Do I only make minimum payments on my credit cards?

Credit cards typically carry high-interest rates on open balances. This means that your balance can quickly balloon if you're only making minimum payments. If your balance was high to begin with, it could spiral out of control quickly.

2. Do I get calls from bill collectors?

Constant phone calls from collectors can be irritating and stressful reminders of your debt. Contact each of your creditors and see if they are willing to negotiate a lower balance or lower monthly payments.

3. Do I use credit cards to pay for necessities?

Paying for basic necessities with a credit card causes those purchases to accrue interest. For this reason, you should aim to only pay for these items with a debit card.

4. Have I considered, or am I considering, debt consolidation?

Debt stems from many sources. Consolidating your payments into one large loan can help you more easily keep track of outstanding debts with one monthly payment. This can also extend more time to your repayment as the new loan will come with new payment terms.

5. Can I pay down debts by selling some possessions?

It can be hard to confront downsizing from a home or getting rid of a car, but taking these difficult steps could allow you to pay off debts and avoid a bankruptcy filing.

6. Do I owe more than I pay?

Your expenses should ideally be covered by your income with some buffer room for emergencies. If your monthly payments exceed your take-home pay, you're a potential candidate for bankruptcy.

7. Am I unsure how much I actually owe?

Uncertainty about your total outstanding debts is cause for concern. Whether your balances have grown larger and you're unaware of the total, or you've forgotten creditors that have sent your debt to collections, you should consider alternative repayment options if you can't tabulate how much you owe.

8. Will bankruptcy actually resolve my debts?

Bankruptcy does not resolve all debt indiscriminately. Some debts, such as student loans, cannot be discharged in bankruptcy. If you're having trouble making payments toward debts that bankruptcy won't cover, you should speak with your creditors to determine your options.

Reasons for Filing for Bankruptcy

If you can reduce your debts or work out a solution with your creditors without resorting to bankruptcy, this is usually the ideal option. However, there can be a number of contributing factors that make bankruptcy your best—and sometimes only—option. Your Local Licensed Insolvency Trustee will review all alternative options with you including reworking your budget, or debt consolidation, credit counselling or filing for a consumer proposal.

Trying to address your increasing debt situation can be overwhelming when you do it alone. It can be even more difficult to address your debt if legal action is involved, such as harassing calls from your creditors or any pending lawsuits for delinquent bills. Talk to your MNP LTD Licensed Insolvency Trustee to figure out a solution tailored to your situation.

Signs You May Have to File for Bankruptcy

There are many danger signs that are important to be aware of if you are thinking about declaring bankruptcy. One warning sign if impending bankruptcy is if you've taken out multiple loans and your pay cheque is being eaten up by your loan payments. If you've gotten to the point where your combined minimum debt payments exceed your normal monthly income, bankruptcy might be the best solution to your debt problem.

Also, if you have more than one debt in collections, this means you have fallen behind on your minimum payment loans and creditors may take legal action. If you think this is your current situation, it is essential to speak to a Licensed Insolvency Trustee about possible solutions and to see if bankruptcy is the best option for you.

Deciding if Bankruptcy is Right for You

If you're struggling to pay your bills on time and calls from creditors just won't stop, it's time to think about some long-term solutions. Your financial situation is unique, so speak with an MNP LTD Licensed Insolvency Trustee to learn more about the bankruptcy process—and explore any alternative solutions that may be available to you. Book a free consultation so we can help you decide if bankruptcy is the right choice for you.

Things to Consider before Filing for Bankruptcy

Before filing for bankruptcy, there are debt relief options that you should consider. There are also some things you should avoid.

If you are struggling financially, you may have enough resources to right the ship, and not even realize it.

Talking to a counselor from a nonprofit credit counseling agency is a good first step, no matter what direction you end up going. A session with a nonprofit debt counselor is free of charge. They will review your finances and discuss the pros and cons of debt management plans, debt consolidation loans and debt settlement, as well as bankruptcy.

A credit counselor will help create a budget with you, but you can take that step on your own. A budget will help you get a realistic picture of what your finances really are. Creating a budget doesn’t have to be complicated. It’s simply a tool that helps you keep track of how much money you have coming in and how much your monthly bills and other expenses cost you a month. To make it work, review it frequently and find ways to cut expenses, if possible.

You should also consult a bankruptcy attorney, even if you plan to file bankruptcy on your own. The initial consultation is free, and you may learn some valuable information about your bankruptcy case.

You may want to consider taking a second job or selling some assets to help pay down debt.

Also, take a hard look at your debt. Is there a way to negotiate it down, lowering interest or fees? Is it a temporary situation or a longer-term problem?

Also look ahead – if you have a big bill or big series of bills coming due, you may want to hold off until you decide if you’re going to file for bankruptcy.

There are also some things you shouldn’t do if you’re seriously considering filing for bankruptcy:

Don’t pay creditors or debt collectors.
Don’t take on new debt.
Avoid unusual transactions (like transferring property to a family member or friend).
Be honest about debt and income.
Don’t touch your retirement funds.
Use common sense.

Do I Qualify for Bankruptcy?

There are two major types of bankruptcies for individuals: Chapter 7 and Chapter 13. Each one has specific qualifications. Neither of them has a minimum amount of debt required to file for bankruptcy.

Chapter 7 bankruptcy is designed for people who truly can’t afford to pay their bills, particularly unsecured debt. To qualify, you must earn less than the median income for a family your size in your state. If your income is too high to qualify, you can take the “means test,” in which a court trustee examines your income and reasonable expenses. If you have enough income to pay your bills, you fail the means test and can’t qualify for Chapter 7. If the trustee determines you don’t have enough income, you pass and can use the debt relief Chapter 7 bankruptcy provides.

If your income is too high for Chapter 7, the other option is Chapter 13 bankruptcy, which is known as the “wage earner’s bankruptcy” because it requires that you have a steady source of income and unsecured debts (credit cards, medical bills, personal loans, etc.) of less than $465,275 and secured debts (home, car, property, etc.) of less than $1,395,875 If you exceed those limits, Chapter 11 bankruptcy might be an option.

Debts that Qualify and Don’t Qualify for Bankruptcy

Not all debts qualify for bankruptcy.

Debts that qualify under both Chapter 7 and 13 include:

Credit card debt
Medical bills
Personal loans
Lawsuit judgments and obligations from leases or contracts

Chapter 13 will also wipe out debts from a divorce (except support payments) and debts for loans from a retirement plan. Technically, student loans can be discharged if you prove undue hardship, but it’s very, very difficult to prove.

Debts that don’t qualify for bankruptcy include:

Child support
Alimony
Some taxes
Debts to government agencies
Secured debt, like car loans and mortgages
Debts for personal injury caused by driving while intoxicated and any court fines or penalties.

There are some people who are considered “judgment proof” because everything they have is exempt under state law. Judgment-proof people may not have to file bankruptcy, because creditors can’t touch their assets if their source of income is from Social Security, pension plans, 401(k) retirement savings, disability benefits, veterans benefits, alimony or support payments.

What Are the Consequences of Bankruptcy?

Consider the consequences of bankruptcy when asking yourself if you should file:

Credit score: Your credit score most likely already has taken a beating because of nonpayment, but filing for bankruptcy will hurt your credit score further. It’s impossible to forecast exactly how far it will drop because too many factors are involved, but experts agree: the higher your score, the more you will fall. If you had a credit score above 700, a drop of somewhere around 200 points is likely. If you’re below 700, the drop could be more like 100-150 points. A Chapter 7 bankruptcy will remain on your credit report for 10 years and Chapter 13 will be there for seven years.
Co-signers: If you have a loan that was co-signed by someone, they agreed to pay if you can’t. In Chapter 7 bankruptcy, the co-signer will still be on the hook to pay. Creditors can go after them for payment, even if your bankruptcy case is discharged (successful). Chapter 13 is a different story. The protective stay that prevents creditors from pursing payments once you file for Chapter 13 extends to the co-signers. The stay remains in effect as long as you make regular payments on your Chapter 13 agreement.
Private life: Filing for bankruptcy means your name goes public. It’s not going to appear on a billboard downtown, but it is available to anyone with a PACER (Public Access to Court Electronic Records) account. The mandatory meeting with creditors occurs in a public forum and it appears on your credit report, for whomever has access to that. In some areas, it could appear in the legal notices of your local newspaper – though this no longer widespread.

Can You Keep Your Home After Filing Bankruptcy?

The good news about bankruptcy and your home is that you won’t lose it – as long as you can make the monthly mortgage payments.

Remember that the purpose of bankruptcy is to give you a chance for a fresh start and it’s a lot easier to start over if you’re not homeless. That’s why bankruptcy laws make homes exempt from creditors’ claims.

If living in a house you can’t afford is part (or all) of the reason you’re filing bankruptcy, then yes, you could (and probably will) lose your home.

In Chapter 7, if you fall behind on payments, you can seek protection for your home by filing Chapter 13 to allow you time to catch up. Or, you may have to throw in the towel and let the bank foreclose.

In Chapter 13, it’s far more complicated, but you essentially return to the default status you were in before declaring bankruptcy. That means creditors who have claims against you can go after you for payment.

Can You Keep Your Car After Filing Bankruptcy?

The bankruptcy system is set up to allow people who file to keep their car. An auto loan is a secured debt – the car is the “security” that you will continue to pay. If you don’t, the lender repossess your car. Bankruptcy discharges unsecured debt.

If you are still making payments on an auto loan, Chapter 7 allows you to “reaffirm” the loan or buy the car outright. Chapter 13 allows people to continue to pay their car loan under a structured plan, but the payments must be made on time. Being up to date on your auto loan payments when you file for bankruptcy makes it more likely you’ll be able to keep it.

If you are no longer paying on your car, it’s an asset and must be listed with your assets, but you will likely be able to keep it.

Are There Any Benefits to Bankruptcy?

Bankruptcy can lead to financial stability.

If you can’t find a way to get out of debt in the next five years – and have diligently researched solutions – then bankruptcy may benefit you.

Some of the benefits are:

A second chance to stabilize finances
A stop on calls and mail from debt collectors
Improved long-term financial stability.
An automatic stay, which halts foreclosures and other legal judgments on money you owe

Everyone’s situation is different, so weigh the pros and cons of bankruptcy as they relate to your financial situation and what you want in the future. Whatever position you’re in, don’t panic. There is a solution. Remember, you can’t go to jail just because you owe someone money, so find a way to fix the problem.

Next Steps

The answer to the question, “Should I file for bankruptcy?” depends on how the qualifications and consequences fit into your financial situation. Whether most of your debt is unsecured or secured, whether the consequences will do financial damage that will hurt your plans for the future, whether you can see another way to resolve your debt challenges – it’s all up to you.

If bankruptcy is the only choice that makes sense after researching all other options, then the answer is “yes.”

The next steps, which will help guide you through the filing and court process are:

Hire a bankruptcy attorney. The bankruptcy process is complicated, with many steps, deadlines and forms to fill out. People who tackle it by themselves often aren’t successful in getting their debt discharged. A bankruptcy attorney generally costs around $1,500 for Chapter 7 and $3,500 for Chapter 13.
Pre-bankruptcy credit counseling. This is required for anyone filing bankruptcy. Credit counseling can also help you stay on track after your debt is discharged in Chapter 7 bankruptcy, or you’re in a 3-5 year Chapter 13 restructuring plan.

Whether you decide bankruptcy is right for you or not, nonprofit credit counseling can help you figure out the best way to attack your debt and rebuild your credit.