When Bankruptcy Makes Sense
Many of us don't like the idea of filing for bankruptcy. In many ways, it feels like admitting defeat. On top of that, there are those who feel as though it is immoral to file for bankruptcy since we agreed to repay money that we borrowed.
Even though these are thorny issues, there are times when bankruptcy makes sense. If you are in such a hole that digging out will cost too much -- in terms of money and time -- it can be a better idea to declare bankruptcy and start over again as best you can.
What Bankruptcy DOESN'T Do
First of all, realize that bankruptcy isn't a "free pass" for most individuals. When you file for bankruptcy as an individual, you have two options. One is Chapter 7 bankruptcy, which is harder to qualify for. With this type of bankruptcy, certain assets are liquidated and used to pay off creditors. If you still don't have enough to cover all of the debts after this liquidation, the debts are written off.
With Chapter 13 bankruptcy, you create a plan to repay your creditors. You don't get a free pass, but you also don't have to deal with the problems that come with continued balance increases due to interest charges and other fees. Chapter 13 is the more common form of individual bankruptcy, and it involves a certain amount of accountability while helping you restructure your finances.
When to Consider Bankruptcy
The time to consider bankruptcy is when you are so overwhelmed with debt that you are fairly certain that you won't be able to dig out within five to seven years. When you have so many obligations that you can barely afford the interest on your loans, you might be in trouble.
Many people get to this point because of a major financial catastrophe. Perhaps you lost your job and turned to debt to help get you through. One of the biggest causes of bankruptcy, though, is medical bills. A number of studies in recent years indicate that medical bills contribute to a large portion of the bankruptcies in the United States. On top of that, many of those who file for bankruptcy due to medical bills actually have health insurance.
When you are hit with a natural disaster, medical bills, or a lost job, trying to get back on your feet is practically impossible. Getting back on your feet is especially difficult if you carried an average amount of debt -- credit cards, car loans, mortgage -- prior to the major financial setback.
Realistically consider your situation, especially if forces outside your control have been at work on your finances. If you can no longer afford your debt payments, bankruptcy might offer the protection and help you need to start over again.