Should You File for Bankruptcy?

Excessive debts cause more than emotional stress. If the debts come to the point that they become too much to handle, you have the option to file for bankruptcy. While this proceeding may absolve you from the repayment obligations to your creditors, it also has grave consequences to your finances and your life.

What is Bankruptcy?

According to Investopedia, bankruptcy is a word used to define a person or a company who is not able to pay his debts. Filing for bankruptcy is a federal process wherein you may be absolved of your debts by allowing the court access to your assets and use such assets to pay all or portions of your an excellent to the creditor. To cut it short, bankruptcy provides you with a new start and clean slate in his financial life.

When the petition for bankruptcy is complete and successful, the debtor is no longer obliged to pay his debts. The creditor loses his rights to sue you or perform any acts that attempt to collect payment from you.

Should You File for Bankruptcy?

Filing for bankruptcy is a huge and life-changing decision. Are you considering bankruptcy as well, or feel that this is the best last resort for your financial situation? You must understand that declaring bankruptcy is often easier said than done. It follows a meticulous process; there are costs involved and it can cause emotional distress. On the other side of the spectrum, it may potentially give you a “free pass” to your repayment obligations and the opportunity to stand up once again.

Here are some questions you need to ask yourself to help you determine if bankruptcy is indeed the best course of action for your financial woes.

Do You Qualify to File for Bankruptcy?

Unfortunately, you cannot just file and assume that you are qualified to file bankruptcy just because you’re unable to manage your debts. For Chapter 7 Bankruptcy, you need to go through and pass the Means Test, which measures your disposable income and expenses against the state average.

The Means Test was the latest requirement for Chapter 7 filers. Passed in 2005, the test placed a tighter restriction on people who wish to file for bankruptcy. If the Means Test revealed that your income is higher than the state average, you have lesser chances to qualify for bankruptcy.
You may also qualify for Chapter 13 Bankruptcy. For some people, filing for the Chapter 13 Bankruptcy seems to be a better option because it gives them a structured repayment plan for 3-5 years. However, you must be able to prove that you have sufficient income, your secured and unsecured debts are not more than the law approves and that tax files are all current.

Which Type of Bankruptcy Should You File?

Essentially, there are two types of bankruptcies that you can file. Depending on the number of debts you have, how much you earn and your assets, you must choose the most suitable type for your case.
For Chapter 7 Bankruptcy, you will need to surrender all your assets, but excluding exempt ones. An appointed trustee sells your assets and uses the proceeds of the sale to cover your debts. With this type of bankruptcy, you could lose your home, car and other assets. It also does not include other types of debts like alimony, child support and student loans.

Chapter 13 Bankruptcy is an ideal option for those who earn a steady income. Under this type, the debtor can work out a 3-5 year repayment plan and allows him to keep most of the assets. This chapter covers debts that Chapter 7 doesn’t, such as mortgages and child support, to name a few.

Both chapters have their highs and lows, and it is best to ponder to consult with a bankruptcy attorney before deciding which chapter to file.

Are You Prepared for the Costs?

While the primary goal of filing for bankruptcy is to absolve you from all, if not most, of your debts, you must know that this process doesn’t come for free. In fact, you need to prepare at least a couple thousand dollars to complete the bankruptcy proceedings.

According to, the filing fee for Chapter 7 is $335, while for Chapter 13, that is $310. Meanwhile, the average attorney’s fees hover around $1,072 for Chapter 7, and it is $2,564 for Chapter 13.

You may be able to augment some of the costs by finding pro-bono and low-cost attorneys to work on your case. Ask within your local bar to find attorneys who may be willing to represent you. Additionally, be careful of lawyers who tend to provide too good to be true promises, or you could end up losing even more money.

Is It Worth it to file for Bankruptcy?

It’s easier to believe that filing for bankruptcy will discharge you most of your debts, and this can be the best opportunity to start afresh. But before you do that, think about how filing for bankruptcy will affect your financial future. Is it worth it?

It is perhaps better to look into your own financial habits and muster the strength to face the roots of your financial dilemmas. If you realize that you’ve been overspending the years and you have been mismanaging your finances, now is the time to admit your errors. With proper budgeting and healthy financial habits, you may still be able to salvage your finances without going bankrupt.

On the other hand, if you believe that filing for bankruptcy is the most sensible solution; do think about it a couple of times and talk to your attorney about all the options you have. Remember, whatever you decide upon can impact you and your family’s life to a significant degree.

How Can Bankruptcy Impact Your Life?

You will be relieved of your debts

Although not all debts are dischargeable, seeing through the entire filing process will significantly relieve you of your financial woes. Debt collectors can finally stop calling you or sending you notices. Your home will no longer go through foreclosure. You will lose a lot of money assets along the way, but you will feel relieved that you no longer have to deal with the pressure of settling your debts. The process has dealt with that for you.

In return, you’ll be also likely to feel that you’ve finally gained back control of your finances. You have this new and fresh chance to rebuild yourself.

It can severely impact your credit score

Like most negative information on your credit report, bankruptcy will stay on your records for seven to ten years. Your score will dip down several points, and in consequence, your financing opportunities will be limited.

It is going to be a challenge, if not impossible, to apply for a credit card. You may not also be able to obtain a mortgage loan while bankruptcy is on your file. You may be able to apply for a line of credit as bankruptcy is about to be dropped off your report, but expected higher interest rates and lower credit limits.

It may impact your employment opportunities

While it is against the law to discriminate against any employee or potential employee due to bankruptcy, some employers still do their due diligence and take a peep on your credit report. If you’re applying for a job that requires the handling and managing of money, you may be in the red.

Fortunately, you can still keep your job and seek new jobs while being fully protected against discrimination. The employer is also prohibited from firing, demoting or even reduce your paycheck.

You may have to deal with the social stigma on bankruptcy

You may be relieved of your debts once your bankruptcy is approved, but that doesn’t remove the stigma our society holds about bankruptcy. In a country like the America where you look after yourself, declaring bankruptcy is a like an honest admission that you’ve been unwise with your money. You might feel troubled or stressed about the society will look at you being bankrupt.

You might suffer from the emotional toll that filing and declaring for bankruptcy will bring to you and your family. Go back to the cause of your bankruptcy and reflect. In America, the top reasons for filing for bankruptcy are medical expenses, divorce, loss of job or income, and lack of insurance. You might feel that it is your fault, but some things just can’t be helped.


Undoubtedly, filing for bankruptcy can bring in a fresh set of challenges, but these are to offset your previous financial mistakes. You may have mismanaged your credit cards, suffered from an expensive disease or the divorce left you with almost nothing which led you to being bankrupt.

Fortunately, bankruptcy is not the end for everything. If you look at the brighter side, it is a great opportunity to start a new and to rebuild your creditworthiness. With introspection, you come to realize what led you to this life-altering decision, and by all means, avoid making the same mistakes again.

Disclaimer: Content found on has been created to be used for informational purposes only and help readers achieve a basic understanding of their finances and financial options. The content is not intended to replace or usurp financial advice from professional accountants, CPAs, etc. If you you’re seeking financial advice, always present any questions you may have regarding your finances to a professional. Never disregard professional advice because of something you read on the internet.

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