When is Bankruptcy Necessary?

Calendar Icon Updated January 15, 2019

Bankruptcy is a word that makes many people cringe with fear, especially when struggling to pay bills or when debt looms. But, bankruptcy exists for a reason — to provide legal support and financial relief for people who are overwhelmed by their financial obligations. While it’s better to avoid bankruptcy, there are some situations where it really is the best option to help you financially and emotionally.

When Bill Collectors Won’t Stop Calling

If you’re struggling financially or carrying the burden of debt, you may be familiar with collections agencies. Bill collectors can contact you do to exactly what they’re name implies — collecting payments on bills and debt. An occasional call from a collector, lender or creditor about unpaid debt may signal that you’re in rough waters, but constant calls for can mean it’s time to seek out financial resources like bankruptcy. If you’re screening collectors’ calls and receiving many of them for debt you can’t afford to pay, consider speaking with a financial advisor or credit counselor about bankruptcy. Starting the bankruptcy process can temporarily protect you from collections agencies — they can’t contact you or take money from you during that time.

When You Can’t Make Payments

Juggling money to pay bills, expenses and debt can be tricky, especially if you’re low on funds. Sometimes, it’s just not possible to pay every bill or make every payment, especially if you’ve recently experienced a layoff, job loss or major financial situation. In some cases, you have other options before filing bankruptcy, like working with creditors and lenders to set up a repayment plan. If this isn’t a possibility, bankruptcy may emerge as a tool to help you get back on your feet.

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When Repayment Plans Aren’t Working

Setting up a repayment plan with a lender or creditor is a great way to pay down debt while stopping collections calls. Repayment plans can be a great tool at helping you avoid bankruptcy, but sometimes they just don’t work. If you can no longer meet the terms of your repayment plan because of a change in work, income, personal circumstances or other financial obligations, bankruptcy may be your next best option. In Chapter 7 bankruptcy, some or all of your debt could be waived. Chapter 13 bankruptcy can help create new repayment plans that better fit your situation and give you the resources like credit counseling, a trustee and access to creditors to guide you being debt-free.

When Debt is Half of Your Income

Many people believe that you have to be destitute — completely struggling or losing your home or car — to file bankruptcy. But, what you have and don’t have aren’t the best ways to determine if bankruptcy is right for you. Take an honest look at your financial situation: if the debt you owe is nearly or more than half your annual income, you should discuss bankruptcy with a credit counselor. For example, Maggie earns $80,000 per year, but she has $45,000 in credit card debt. It’s easy to see that she’s likely struggling to pay off her credits cards, on top of every day expenses like groceries, fuel, utilities and her mortgage. When debt tips the scales of your income level, bankruptcy can help you clear it or repay it without drowning.

When You Can’t Afford Basic Necessities

Debt can have a way of creeping up on you, starting small and snowballing due to interest or multiple missed payments. But when debt begins to take over your budget, it can impact how you live day to day. If you find yourself maxing out credit cards on basic needs like groceries or utilities because your bank account is low, it may be time to consider financial alternatives (like bankruptcy). Just because you owe money on a mortgage, car, credit cards or other accounts doesn’t mean you have to go hungry or without every day essentials.

If you identify with any of these situations, it’s time to schedule an appointment with a credit counselor, financial advisor or attorney to see what your next step is. Bankruptcy is a useful tool at helping you escape the burdens of overwhelming debt, and these trusted professionals can help you create a game plan for reaching financial success — whether or not it’s through a bankruptcy filing.

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