To File for Bankruptcy or Not: Factors to Consider

By Cara O'Neill, Attorney
Learn about factors that you'll want to balance when deciding whether bankruptcy is right for you.

No one wants to file for bankruptcy, so if you find yourself struggling with the idea, you’re not alone. And even if you’re ready to do so, determining whether bankruptcy is right for you can be challenging. For instance, you’ll need to consider how much money you make now and whether you’ll make more in the future; the amount of property that you own currently and how you’ve disposed of it in the past; the type of debt that you owe and whether you came by that debt honestly. Simply put, there are a lot of moving parts. In this article, you’ll learn about the factors you’ll need to balance to determine whether filing will be the right choice for you.

(If you’d like an overview, start with the basics in Choosing the Type of Bankruptcy: Chapter 7 or 13.)

When It Makes Sense to File for Bankruptcy

People begin thinking about filing for bankruptcy when the financial pressure gets to be too much to endure. If you’re facing one of the following situations, bankruptcy will likely do an excellent job of providing a fresh start:

  • You have a large amount of medical bills or credit card debt.
  • You can’t pay the minimum payment amount due on your credit accounts.
  • You don’t anticipate making more money shortly.
  • You want to prevent a vehicle repossession or home foreclosure.
  • Your employer notified you of a wage garnishment (a creditor is going to start deducting money from your paycheck).
  • You don’t want to tap into a retirement account to pay off your bills (you can protect most pensions and retirement accounts).
  • You’ve been served with a lawsuit and want to avoid a judgment.

A Chapter 7 bankruptcy will solve most of these problems for people who make less than their state’s median income. If you make more than the median income, or you want to catch up on a car or house payment, Chapter 13 bankruptcy might be the right solution for you.

When Filing for Bankruptcy Doesn’t Help (or Isn’t Necessary)

It’s common to want to get rid of debt without losing any property—and many people qualify to do just that. But for some, it doesn’t work out that way, and others don’t need to file at all. For instance, bankruptcy might not make sense if:

  • you’re judgment proof (you don’t have income or property that your creditors can collect), or
  • you’ve filed bankruptcy recently, and you’re not entitled to wipe out more debt (receive another discharge).

(Find out when you can discharge debt again in How Often Can I File for Bankruptcy?)

Also, being in an uncomfortable financial situation doesn’t mean that you’re bankrupt. If you have enough assets to pay your bills, bankruptcy isn’t going to help you.

Example 1. Shawn and Christie earn $150,000 per year and live a luxurious life. Even so, they’re short by $1,000 each month. After Christie learned that it’s possible to pay creditors “pennies on the dollar” in a Chapter 13 repayment plan, she set up an appointment with a bankruptcy attorney. However, they found out that their lifestyle is more extravagant than what’s allowed under the bankruptcy rules and that they’d have to repay their creditors in full. Because their problems stemmed from a lifestyle choice rather than from being bankrupt, they decided to trim their expenses and negotiated down their credit card debt instead. (Find out more by reading How to Negotiate a Credit Card Debt Settlement: The Process.)

Example 2. Jessie was unable to meet her monthly expenses after a recent job loss, so she turned to a local bankruptcy attorney for help. She explained that she’d like to wipe out $60,000 in credit card debt and keep the $300,000 home that she owns free and clear. However, the attorney told her that according to her state rules, she could only protect (exempt) $100,000 in equity, which would leave $200,000 in unprotected (nonexempt) equity that could be used to pay off her debt. Given that the bankruptcy trustee (the individual responsible for managing her case) could sell her house in a Chapter 7 matter and use the proceeds to pay off her credit card balance, she realized that bankruptcy wasn’t the right choice for her. (Learn more by reading Chapter 7 Bankruptcy Exemptions: What Property Can I Keep?)

When Filing for Bankruptcy Is a Bad Idea

When people start feeling pressure in other areas of life—for instance, during the midst of a lawsuit—it’s common to consider taking shelter in bankruptcy court. While it will work in many cases, it might not be the haven you seek if you’re facing a fraud allegation. Some situations that would likely be considered bankruptcy fraud include:

  • You recently ran up your credit cards knowing that you plan to file for bankruptcy.
  • You gave false financial information to a creditor when obtaining credit.
  • To avoid paying your creditors, you transferred property to a friend or relative for less than the fair market value before filing for bankruptcy.
  • You hid property or money that you don’t plan on disclosing in your bankruptcy petition.
  • You knowingly used business assets for your personal purposes before filing for bankruptcy.
  • You are currently being accused of fraud in a lawsuit in another court.

In any of these circumstances (as well as others not listed), a creditor or a prosecutor could file a lawsuit against you. Because the bankruptcy court has ample experience spotting financial dishonesty, the ramifications could be steep. Not only will a losing filer remain responsible for the debt, but the filer could face 20 years in prison and a fine of up to $250,000, too.

(Learn more about this topic here: Avoiding and Reporting Bankruptcy Fraud.)

Are You Emotionally Ready to File for Bankruptcy?

Not everyone is willing to file—even if it objectively makes sense. Someone who believes that filing for bankruptcy is unethical or feels that it represents a personal failure might need time to explore (and exhaust) all other options. Or, it might not provide the solution that you want. For instance, not everyone can save a home from foreclosure because it requires the ability to pay the current payment while making up the arrearages over time. An individual who doesn’t make enough to do so might need a chance to adjust to the idea of letting go of the house.

Here are a few additional consequences that you'll want to be prepared to accept.

  • Bankruptcy will remain on your credit report for seven to ten years (but the impact diminishes with time).
  • You’ll likely have a difficult time renting for a couple of years.
  • You’ll pay a high rate of interest on a car purchase until you rebuild your credit.

Whatever the situation might be, until you decide that the benefits outweigh any detriment, filing won’t be right for you.

Getting Advice From a Lawyer

Don’t be surprised if you have issues pulling you in different directions. In such a case, you’ll have to determine which course of action will cause you the least financial damage. A knowledgeable bankruptcy attorney can identify the pros and cons and explain the best option for you.

Questions for Your Attorney

  • I’m facing a wage garnishment, and I recently charged up my credit cards—should I file now or wait?
  • Do I make too much money to benefit from bankruptcy?
  • Which bankruptcy chapter would be right for me?
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