When Bankruptcy Makes Sense

In tough economic times, bankruptcy can provide a pathway out of financial distress. However, deciding whether to file can be confusing and daunting. If you are facing any of the following situations, bankruptcy may be a good option.

Overwhelming Medical Bills

Researchers have concluded, of the estimated 1.5 million personal bankruptcies filed annually; nearly 50% are due to high health costs, even though 76% of the filers are covered by insurance at the onset of illness. Even relatively minor medical events cans trigger overwhelming medical bills. If you have large medical debts, it is always encouraged to exhaust all other options; such as negotiating payments with the hospital or doctor, before resorting to bankruptcy. When medical bills reach the point beyond your capability to pay, Chapter 7 liquidation bankruptcy is usually the best method to discharge this unsecured debt.

Loss of Job or Reduction in Income

Lost or reduced wages make it difficult, if not impossible, to pay off your debts. In fact, you're likely to get in even deeper debt just trying to cover living expenses. Even after finding a new job, it may take a long time to catch up on payments. Chapter 13 consolidation bankruptcy might be a good option here. This type spreads out the debt over time and allows the consumer to catch up while going through an administered program to help him/her get back on track.

Bankruptcy will also prevent lawsuits and garnishments; allowing the filer to operate on his/her full income.

Divorce

Divorce is another common reason people file for bankruptcy. In most cases, debts are spread between both spouses. In many of those cases, one or both of the spouses are unable to afford those debts. Bankruptcy helps create a cleaner financial break.

Alimony and child support are not dischargeable in bankruptcy, but they can usually be repaid through a Chapter 13 bankruptcy.

Overwhelming Consumer Debt

Overwhelming consumer debt can result from many factors beyond job loss or income reduction. Filing for bankruptcy can help make these debts manageable. Chapter 7 filers have debts somewhere between $50,000 and $75,000. Even with a reasonable interest rate, it would be very difficult to pay off this amount.

Some might consider liquidating their 401k to help pay down the debt, but using one's retirement is never recommended as a means of getting out of debt. Bankruptcy is a much better option and may even have some tax advantages; since the debt that is discharged cannot be treated as income and therefore, cannot be taxed.

Still, consumers should not be hasty about resorting to bankruptcy before weighing the factors of the impact of your credit rating and if you will need to apply for credit in the near future.

Foreclosure

Homeowners who are at risk of foreclosure may find a solution in bankruptcy. When foreclosure is looming, bankruptcy is a very effective means of allowing someone to keep their home. A Chapter 13 bankruptcy can help homeowners who have fallen behind on their mortgage payments and provide a solid long-term method for a homeowner to be able to manage a mortgage. Meanwhile, a Chapter 7 bankruptcy can buy time for someone facing a foreclosure by stopping the pending action and requiring that a new foreclosure be initiated at a later date. The Chapter 7 bankruptcy also will address other debt issues that the homeowner is facing and prevent any collection activity from junior lien holders that (were) not satisfied with the proceeds from the foreclosure sale.

Bankruptcy may be an effective option for you to resolve your debt issues. But keep in mind, there are serious consequences related to bankruptcy, so it should be reserved as a method of last resort. Also remember, the purpose of bankruptcy is to resolve debts and to create a fresh start. Use this "second chance" to establish good, or even better than before, spending habits. Create a budget, a savings account and make good investments; these things will hopefully prevent any future bankruptcies.