No one wants to file for bankruptcy. But if you have debts you can’t manage and your life is trending out of control, it might be time to consider whether bankruptcy can help you.
In this article, we’ll discuss 11 surefire indicators that you have a debt crisis on your hands, and if you fall into one or more of these categories, you’ll need to take some corrective action. If some of these sound familiar, rest assured that you’re not alone, that it’s not the end of the world, and there is help!
Understanding the Different Types of Bankruptcies
Before going over the signs, it is helpful to understand the differences between types of bankruptcy. The two most common types are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 bankruptcy (also known as “liquidation bankruptcy”) involves selling your non-exempt assets to pay off your debts, whereas Chapter 13 bankruptcy (also called “reorganization bankruptcy”) involves working with the court to pay back your debt over a 3-5 year period.
The type of bankruptcy you choose depends on your assets, income, and financial situation. You will need to talk to a qualified bankruptcy attorney to assess your financial situation and help you determine the best path for your situation.
With that in mind, here are 11 tell-tale signs you might need to consider filing for either a Chapter 7 or Chapter 13 bankruptcy.
- Overwhelming Debt
Do you owe more than you own and earn? Does it seem like you’ll never manage to repay all that you owe? Are interest and late charges racking up? If your debts and non-tax liabilities exceed your assets and income, and this situation appears irreversible, then bankruptcy is in order. It will relieve you of unsustainable debt, right the ship, and free you to move forward with a real chance of financial security.
- Using Credit Cards for Essentials
Using credit cards for daily needs, such as buying groceries or paying utility bills, is a reliable indicator of a lack of financial resources. When you have to use credit cards to pay for living expenses because your income is insufficient, debt can mount up quickly, attracting high interest rates and making it harder and harder to escape debt.
- Constant Calls from Creditors
Receiving regular calls or letters from creditors or collection agencies is a significant red flag that you’re not making payments or managing your debt well, and your situation is getting worse. When you file bankruptcy, an automatic stay goes into effect and prohibits creditors or debt buyers from any further contact with you or harassing you as long as the bankruptcy is in force (this is one of the main benefits that bankruptcy can offer you!).
- No Savings
Having no savings, no emergency fund and being paycheck-to-paycheck really sets you up for financial crises. Without a cushion, minor setbacks can become major catastrophes. Bankruptcy could save you from this predicament by discharging some debt, enabling you to reset and build up a savings buffer to protect against future calamities.
- Risk of Foreclosure or Repossession
The inability to pay your home, car or other property taxes in a timely manner should be considered a red alert with regard to your financial wellbeing. When your home or car is at risk of foreclosure or repossession, it means that the debt you have is more than what you can afford to pay back, and it puts your most important assets or income in danger.
More than any other, this one indication might be sufficient justification for thinking about declaring bankruptcy on its own. In most instances, bankruptcy will stop such actions, giving you time to restructure your debts and possibly retain those assets or income.
- High Medical Bills
Unexpected medical bills can quickly mount into a nightmare, especially if you’re uninsured or underinsured, and the high cost of medical care can compound existing debt. Bankruptcy can relieve this financial burden by eliminating or reducing such debt, providing a lifeline for those drowning in medical debt.
- Loss of Income
A huge drop in income, whether you lose your job or become ill, will inevitably affect your cash flow. If your income goes down and your expenses stay the same, it is easy to get into debt very quickly. Bankruptcy might help adjust your debts and give you a chance to get your finances in order while you are going through a tough period.
- Legal Actions
Lawsuits, wage garnishments and repossessions are all evidence of an unmanageable debt. Creditors are assertively attempting to force repayment, and it is taking a toll on you financially. Bankruptcy offers you a framework to handle your debt or to get rid of it entirely. It is something you should consider if creditors are taking aggressive actions to collect their money.
- Maxed Out Credit Cards
Maxing out credit cards and failing to make even the minimum payments were two certain signs of financial distress. Credit cards with high balances and high interest rates could easily create a debt trap. If you can’t pay down the balances, bankruptcy could wipe out or reschedule the credit card debt and provide the financial relief (and path to greater financial health) you’re seeking.
- Consistently Missing Payments
It’s a warning that your payments aren’t sustainable, or that if you’re not making them, you’re coming dangerously close to a point where you won’t be able to catch up. Late payments mean late fees, more interest and a poor credit rating. If you are unable to make payments on time, you should consider bankruptcy to stop the payments from piling up.
- Using Loans to Pay Off Debts
Using personal loans or payday loans to clear your other debts is risky behavior, especially since these types of loans can trap you in a cycle of borrowing with their high interest rates and fees that make it difficult to get out of debt. Asking for more money so that you can pay back what you owe is a slippery slope to financial disaster: You might start to use new loans to clear your old ones, and before you know it you’re in a circular pattern of borrowing.
Final Answer?
You may want to think twice (or more times) before pulling the trigger on a bankruptcy filing, especially if you have not first examined all the other alternatives available, and don’t know the consequences of the filing.
The first consideration is whether bankruptcy is really the best way to deal with your situation. Have you looked into other ways of dealing with your debt, such as debt consolidation, credit counseling, or seeking payment plans from your creditors? For some people, these alternatives can provide the relief they need without having to file for bankruptcy.
If you have exhausted all other possibilities and reached the conclusion that bankruptcy is the best way to proceed, then the next step would be to analyze which kind of bankruptcy is best for you. As you may recall, there are two primary types in the U.S.: Chapter 7 and Chapter 13. Both differ in their requirements and ramifications, but a bankruptcy attorney can provide insight and guidance on how to approach this decision.
Seeking Professional Legal Advice
Before taking any irrevocable steps, be sure to consult a bankruptcy attorney who can explain the process, lay out the options, describe potential consequences, and help you navigate the entire process.
You can save your home and eventually get your finances back on track by taking the time to weigh all the options and speaking with a bankruptcy attorney. If you do this, you will probably make the right decision and be able to move on with your life towards a brighter financial future. Get help you need today by contacting Ted Machi & Associates to discuss your options!