How to Decide When to File Bankruptcy & the Point of No Return
- 1). Examine alternatives to bankruptcy, such as working with your creditors to create a new repayment plan or agreeing to pay a lump sum less than the total owed but acceptable to the creditor as full debt payment. There are also several private credit counseling services that can negotiate with your creditors on your behalf to have your monthly payments lowered and the total debt owed reduced. Filing for bankruptcy should always be the last option.
- 2). Research the types of bankruptcy filings available to individuals. Chapter 13, which is a reorganization of your debt through a multi-year payment plan, is utilized by most people who have assets, such as a home, they wish to keep. This contrasts with Chapter 7, where all the debtor's assets are liquidated, with some exceptions. However, with a Chapter 7, the debt is wiped out and the debtor moves on free and clear without a payment plan.
- 3). Determine whether you are eligible for the type of bankruptcy you want to file. For example, to qualify for Chapter 13, you must be employed or have a recurring income that exceeds basic monthly expenses such as food, rent and utilities. Likewise, you cannot file for Chapter 7 if your income is high enough to pay off your debts through a Chapter 13 payment plan.
- 4). Determine what will happen to your major assets, such as your home or car, in bankruptcy. If you are filing for Chapter 13, learn what exemptions exist in your state. For example, many states have a "homestead exemption" for primary residences up to a certain dollar amount. A few states also have exemptions for personal property and vehicles. However, most of these assets will be liquidated--that is, sold off for cash--during Chapter 7, although a debtor may be able to keep his vehicle through Chapter 7 in limited circumstances. Find out if you qualify for any special exemptions.
- 5). Review past loans to determine whether you had any co-signers. If you file for bankruptcy, the co-signer is stuck with the debt. Talk to any co-signers about your choice to file for bankruptcy.
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