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    Expert: Here’s when you should consider bankruptcy

    Joanna Campione
    November 10, 2017

    You don’t have to be a compulsive spender to end up deep in debt. One medical problem or unwise financial decision is all it can take. Regardless of how you got there, there is no easy way out, short of an unexpected cash windfall.

    If you’ve fallen into what feels like insurmountable debt … and you have no way to pay for it, bankruptcy is one option. But it’s not always a good one—and never one to be taken lightly.

    Here’s what you need to know before making any decisions about filing for personal bankruptcy:

    Lasting effects

    Nearly 800,000 people filed for bankruptcy last year, a move that will have an impact on their already-strained finances for years. “This is a decision that has long term ramifications,” says Greg McBride, chief financial analyst at Bankrate. “And it’s not a get out of jail free card.”

    While filing for bankruptcy can help turn around money problems of the past, it can negatively affect your future. McBride points out that bankruptcies will stay on people’s records for up to 10 years, and it’s not something that can be done again for many years.

    It can also hurt you if you’re looking for a new job. Many employers run a credit check on prospective employees, and a bankruptcy will always show up. The same thing could happen when you go to rent a home. And it could also have an impact on insurance premiums, says McBride.

    Weighing your options

    But for some people bankruptcy may be the only choice. So how do you know it’s the right one for you?

    To start, it’s important to figure out what got you in the predicament you’re in. “If it’s a one-time medical event, it’s different from overspending for years and racking up credit card debt,” says McBride. If a one-time situation got you deep in debt, filing for bankruptcy and moving forward may not alter your life too significantly. But if you have trouble with handling money, you likely need more assistance than what the bankruptcy process will provide.

    Before making any decision about filing for bankruptcy, McBride suggests talking to a non-profit credit counseling agency. If you are going through that pipeline, says McBride, the counselors will give you an idea if it is something you should consider and can give budgeting advice and other money tips if you decide to go a different route.

    It’s more than another set of eyes. “The decision to file for bankruptcy is up to the individual not the counselor,” says Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a nonprofit financial counseling organization. “It is up to the credit counselor to make sure people are as informed as possible so they understand how each option would impact their financial situations,” he says.

    Starting the legal process

    If you decide bankruptcy is your best path forward, the next step is to consult at least one bankruptcy attorney. “Interview them,” says McBride, “but also see what their recommendations are.” Yet another set of eyes.

    If the attorneys suggest moving forward and you go through with the bankruptcy, you’ve got two options: Chapter 7, total liquidation, or Chapter 13, often referred to as the wage earners’ plan.

    In 2016, 490,365 people filed for Chapter 7 bankruptcy, which involves the liquidation of your assets to pay your debts. Here’s how it works: You go to court, and if the bankruptcy is discharged, the court can release you from all or most of your obligations. But that comes at a steep price. A trustee is appointed and arranges the selling off of your non-exempt assets. The trustee will oversee the auction of property and money earned from it. There is no set list of what will be liquidated, and it varies from state to state.

    A less severe option is Chapter 13. In 2016, 296,655 people filed for Chapter 13 bankruptcy. It’s essentially a structured repayment of the debt for less than the full balance. It is administered by a court-appointed trustee who manages the payments made to creditors, and you have no direct contact with him or her.

    Chapter 13 allows those in debt to keep their property and pay back their debts over a period of time, which is usually three to five years. One of the benefits to filing Chapter 13 is that it allows homeowners the opportunity to save their homes from foreclosure. But while the filing can stop foreclosure proceedings, the homeowner must still make mortgage payments each month.

    The bottom line is if you are in over your head financially, you do have options. But, says McClary, “Get a professional opinion on what the next course of action may be, and make a decision based on that feedback.”

    The most important thing is talking to people who can explain your options fully to you based on your situation, he says, as well as the repercussions associated with them.

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