When Should You File for Bankruptcy?

| by Kevin Chern

The decision to file--or not file--for bankruptcy protection is a very personal one, and there are many factors to consider. The best way to make this decision is to speak with a qualified bankruptcy attorney in your area and provide complete information about your debts, income and assets. However, there are some general factors that can help you determine whether it’s time to speak with a bankruptcy attorney.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" ?>


Are your problem debts primarily secured or unsecured?


Most unsecured debts can be eliminated in Chapter 7 bankruptcy, so for those primarily troubled by high credit card debt, unpaid medical bills, payday loans or other unsecured debt, bankruptcy may be the answer. Unsecured debts can usually be “wiped clean” in bankruptcy, providing the debtor with a fresh start. For those with primarily secured debt, such as mortgage loans and automobile loans, bankruptcy may still be beneficial, but the analysis is more complicated, and a Chapter 13 bankruptcy repayment plan might better protect the property securing those debts.


Are your balances increasing even when you’re not spending money?


Some credit card debt is manageable—it just requires a bit of resolve, a solid plan, and a little time to chip away. But credit card debt, like payday loans and other high-fee, high-interest debt, can take on a life of its own. Many well-intentioned debtors struggle to make minimum payments on their debts and still watch the balances continue to climb as late fees and interest are added; that’s just throwing good money after bad.  For people whose accounts are headed in the wrong direction even though they’re no longer in use (or no longer have any available credit), it may be time to consider bankruptcy.


Do you have income or assets to protect?


For some people, bankruptcy isn’t an immediate necessity because they simply have nothing to lose. A person with no garnishable income and no non-exempt assets may not have the same immediate need for bankruptcy protection as a person who stands to lose personal property or see his wages garnished or bank accounts attached by creditors. 

Exemptions and the amount of income that is protected from garnishment vary from state to state.


Are you in danger of losing your home to foreclosure or your car to repossession?


For many people, the decision to file for bankruptcy is triggered by a need for the protection of the automatic stay.  In most bankruptcy cases, the automatic stay immediately stops creditors from pursuing any further action. That means that for someone in immediate danger of foreclosure, repossession, or other serious action, bankruptcy can create the breathing room to sort out a solution.  Since auto loans and home loans are generally secured debt, bankruptcy won’t make them disappear—but it will, in most cases, halt collection action in the short term. Not only does this allow time to explore options and alternatives, but a bankruptcy discharge of unsecured debts may free up money to bring secured debts current and save the home or vehicle that’s in jeopardy. The automatic stay can also halt wage garnishment.


The bottom line is that differing circumstances and priorities mean that everyone’s decision-making process will be a little different. But if you find your debts growing month after month, even though you’re not adding to them—if your wages are being garnished or you are in danger of losing income through garnishment or your home, car or other property through foreclosure or repossession—it is time to schedule a consultation with a bankruptcy attorney.

Attorney Kevin Chern is the former managing partner of the nation’s largest consumer bankruptcy law firm.  He currently serves as President and co-founder of Total Bankruptcy, Inc., the first nationwide network of consumer bankruptcy attorneys. The Total Bankruptcy website, at, provides thousands of pages of free information about bankruptcy, debt, credit, mortgage foreclosure and economic issues.