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Experts: How To Know When It’s Time To File for Bankruptcy

FuzzMartin / Getty Images
FuzzMartin / Getty Images

Bankruptcy. It’s a word that evokes dread in many Americans. Why? Because it may feel like the end of the road, the last resort, the end, in a way, of the game of debt.

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But how does one know it’s time to file for bankruptcy? What happens when you file for bankruptcy and how does it impact your overall financial picture and existing assets? And finally, how can you rebound financially after filing?

GOBankingRates consulted experts to get a full understanding of the big picture of filing for bankruptcy in terms of when to do it, how it affects your finances and how you can recover.

When To File for Bankruptcy: The Telltale Signs

Filing for bankruptcy is a monumental decision that should be considered only when you’re in dire straits and you have no other way out of debt.

“[Bankruptcy] should only be considered after many other options have been considered, including debt consolidation or negotiating with creditors,” said Meredith Lepore, editor of Credello.

She said these are the deciding factors for bankruptcy filings: you have no assets or income, you owe money you cannot pay, you are being harassed by creditors, you are facing foreclosure or property repossession, you have too much high-interest credit card debt or medical bills or you have gone through divorce or suffered a serious illness.

Keep in mind that you should have a goal when you’re filing for bankruptcy.

“Bankruptcy should be considered as a way to control your debt and keep creditors off your back,” Lepore said.

How Bankruptcy Affects Your Financial Status and Assets

Bankruptcy is scary for a reason. It hurts your credit score — but it’s important to note that any damage bankruptcy does to you is more like icing on an already damaged cake. You’ve already incurred harm by being in long-term debt and collections.

“Filing bankruptcy will cause your credit score to decrease in the short term and can raise interest rates on car loans and other types of credit,” said Keith Rucinski, CPA, JD, at Chapter 13 Trustee in Akron, Ohio. “However, the damage to your credit score and credit history is done long before you file for bankruptcy. Creditors have already reported delinquent accounts to the credit bureaus.”

A Bankruptcy Lawyer Can Help

You are afforded some protection, though, via certain U.S. laws that a bankruptcy attorney can walk you through.

“Bankruptcy laws include federal and state laws on exemptions,” Rucinski said. “These exemptions can protect your assets from legal actions by creditors. These laws can help protect your home, car, wages and retirement funds. U.S. bankruptcy laws are designed to help honest people who are having financial difficulties obtain a fresh financial start.

“An experienced bankruptcy attorney can help you determine what exemptions are available in your state to protect your assets. Chapter 13 is a bankruptcy option to help people retain their assets and make up missed payments to creditors over a three- to five-year time period.”

Getting Back on Your Feet

Once you file for bankruptcy, you may be feeling ensconced in doom and gloom. Take a deep breath and remember that there is a road to rebuilding your credit score and financial health. Follow these steps:

  • Check your credit report and monitor your credit score. “It’s essential to take an in-depth look at your credit report,” Lepore said. “Spotting potential issues and coming up with a plan is a must. By monitoring your credit score, you can decipher which factors you should focus on to improve your score. If you are spread too thin, consider debt consolidation.”

  • Practice good credit habits. “Making regular, on-time payments and not overextending your credit are two key habits for establishing a healthy credit score,” Lepore said. “Taking the time to build up from small amounts of borrowing is essential if you want positive long-term results.”

  • Get a secured credit card. “Getting a secured credit card can help you rebuild your credit after bankruptcy by allowing you to establish a positive payment history,” Lepore said. “You put down a cash deposit which is usually equal to the credit limit on the card, and this then serves as collateral. As you use the card and make your on-time payments, the lender will report your activity to the credit bureaus, which can help improve your credit score. And if you are making your payments in full each month, this will also show the lenders that you are responsible with credit. Plus, a secured credit card can also help you to improve your credit utilization ratio. A low credit utilization ratio is another positive point for creditworthiness.”

  • Credit-builder loans. “Credit-builder loans also help you establish a positive payment history,” Lepore said. “These loans typically have small amounts and are used to make regular payments over a set period. As you make on-time payments, the lender will report your activity to the credit bureaus, which can help improve your credit score.”

  • Consider a co-signer. “A co-signer is also a viable option for helping to build your credit score,” Lepore said. “If your credit score is not strong enough, consider adding a co-signer to the loan who has a better credit score. Be aware that co-signers are responsible for the loan if you stop payments, meaning that their credit history and score will be impacted as well. Make sure you have good communication with the co-signer when it comes to payments.”

There is light at the end of the tunnel, though it will take some time — typically about 18 to 24 months — to build back your credit, Lepore said.

You Are Not Alone

Though surely not the most popular thing to do, filing for bankruptcy is not exactly rare, either. According to statistics from the Administrative Office of the U.S. Courts, there were 383,810 annual bankruptcy filings in September 2022 — down from 434,540 cases in 2021. This should give people some comfort in knowing that, if they’re filing for bankruptcy, they’re far from alone.

Additionally, consumers should know that it is not fancy cars and lavish mansions driving bankruptcy filings in America; it’s actually hospital bills. According to a recent study from Debt Hammer, medical debt is the No. 1 cause of bankruptcy.

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This article originally appeared on GOBankingRates.com: Experts: How To Know When It’s Time To File for Bankruptcy