How to Decide if you Should Declare Bankruptcy
- 1). Analyze your cash flows. The official calculations are complex, but if you have enough income to pay your basic living expenses and make payments on your debt, you are unlikely going to be allowed to declare bankruptcy.
- 2). Compare your income to your state's median income. If your cash flows show that you cannot pay all your debts but you make more than the median income for your state, you will likely be prevented from filing under Chapter 7 (forgiveness of debt) and will have to file Chapter 13 (restructuring of debt payment).
- 3). Identify the assets and liabilities you will keep in bankruptcy. In most states, you will keep your home. At the same time, there are liabilities you would likely retain in (Chapter 7) bankruptcy, such as child support, spouse support, student loans, fines, and recent taxes.
- 4). Consider the benefits. The benefits of Chapter 13 are a lowering of debt repayments, but you still have to pay off the debts. The benefits of Chapter 7 are the forgiveness of debts such as personal loans, credit cards, medical bills, and repossessed vehicle debt.
- 5). Consider the cost. You'll pay roughly $2,000 for an attorney to assist you with filing bankruptcy. And, of course, your credit will be damaged for ten years, which means buying anything on credit during that time will be difficult (denied credit for buying, higher interest rates). You may also have to explain to a future potential employer that you filed for bankruptcy.
- 6). Consider the psychological impact. People facing bankruptcy are usually facing painful circumstances such as ex-spouses running up debt, loan cosigners abandoning payments, layoffs, excess spending, or failed investments. The act of declaring bankruptcy has a sense of finality where you formally recognize these difficult circumstances by passing on their impact to someone else (i.e. the people to whom you owe money). At the same time, it is a relief to escape debt burdens that seem insurmountable to create a new start.
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