Experts: How to Know When It's Time to File Bankruptcy (2023)

Bankruptcy. It's a word that evokes dread in many Americans. Why? Because it can feel like the end of the road, the last resort, the end, in a sense, of the debt game.

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But how do you know what it is?time to declare bankruptcy? What happens when you file for bankruptcy and how does it affect your overall financial picture and existing assets? And finally, how can you financially recover after filing?

GOBankingRates consulted with experts to gain a complete understandingthe big picture of filing for bankruptcy in terms of when to do it, how it affects your finances and how you can recover.

When to declare bankruptcy: the telltale signs

Filing for bankruptcy is a monumental decision that should only be considered when you are in dire straits and have no other way to get out of debt.

“[Bankruptcy] should only be considered after many other options have been considered, including consolidating debt or negotiating with creditors,” said Meredith Lepore, editor ofcreel.

She said these are the deciding factors for filing for bankruptcy: You have no assets or income, you owe money you can't pay, you are harassed by creditors, you are facing foreclosure or repossession, you have a lot of credit card debt with high interest rates or medical bills or have been divorced or had a serious illness.

Remember that you must have a purpose when declaring bankruptcy.

“Bankruptcy should be seen as a way to control your debt and keep creditors away from you,” Lepore said.

How bankruptcy affects your financial situation and assets

Bankruptcy is scary for a reason. This affects your credit score, but it's important to note that any damage bankruptcy does to you is more like icing on an already damaged cake. You've already taken damage from having long-term debt and collections.

"Filing for bankruptcy will lower your credit score in the short term and can increase interest rates on auto loans and other types of credit," said Keith Rucinski, CPA, JD, inChapter 13 Receiverin Akron, Ohio. “However, the damage to your credit score and history occurs long before you file for bankruptcy. Lenders have already reported delinquent accounts to the credit bureaus.”

A bankruptcy attorney can help.

However, you do get some protection through certain US laws that a bankruptcy attorney can guide you through.

“Bankruptcy laws include federal and state exemption laws,” said Rucinski. “These exemptions can protect your assets from legal actions by creditors. These laws can help protect your home, car, wages, and retirement funds. The US bankruptcy laws were designed to help honest people with financial difficulties get a new financial start.

“An experienced bankruptcy attorney can help you determine what exemptions are available in your state to protect your assets. Chapter 13 is a bankruptcy option to help people retain their assets and make up for missed payments to creditors over a period of three to five years.

get back on your feet

After filing for bankruptcy, you may find yourself in shambles and gloom. Take a deep breath and remember that there is a path to rebuilding your credit score and financial health. Follow these steps:

• Check your credit report and check your credit score."It's essential to take a good look at your credit report," said Lepore. “Spotting potential problems and developing a plan is essential. By monitoring your credit score, you can find out which factors to focus on to improve your score. If you're too scattered, consider debt consolidation."
• Practice good credit habits."Making regular, timely payments and not overextending your credit are two important habits in building a healthy credit score," said Lepore. “Taking the time to leverage small loan amounts is essential if you want long-term positive results.”
• Get a secured credit card.“Getting a secured credit card can help you rebuild your credit after bankruptcy, allowing you to establish a positive payment history,” said Lepore. “You make a cash deposit that is usually equal to the card's credit limit, and then it serves as collateral. As you use the card and make your payments on time, the lender will report your activity to the credit bureaus, which can help improve your credit score. And if you're making your payments in full each month, it will also show creditors that you're responsible for your credit. In addition, a secured credit card can also help you improve your credit utilization rate. A low credit utilization ratio is another credit positive.”
• Loans for credit builders.“Credit builder loans also help establish a positive payment history,” said Lepore. “These loans are usually small in amount and are used to make regular payments over a set period. As you make payments on time, the lender reports your activity to the credit bureaus, which can help improve your credit score.”
• Consider a co-debtor.“A co-signer is also a viable option to help you build your credit score,” said Lepore. “If your credit score isn't strong enough, consider adding a co-signer to the loan who has a better credit score. Keep in mind that co-signers are liable for the loan if you stop making payments, which means your credit history and score will also take a hit. Make sure you have good communication with the co-signer when it comes to payments.”

There is light at the end of the tunnel, although it takes some time, usually 18 to 24 months, to rebuild your credit, Lepore said.

Not alone

While it might not be the most popular thing to do, filing for bankruptcy isn't exactly uncommon either. According to statistics from the Administrative Office of the US Courts, there were 383,810 bankruptcy filings per year in September 2022, up from 434,540 in 2021. That should reassure people that if you file for bankruptcy, you won't be alone.

Furthermore, consumers should know that it is not luxury cars and luxury mansions that drive bankruptcy filings in the United States; they are actually hospital bills. According to a recent study by Debt Hammer, medical debt is the leading cause of bankruptcy.

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