When Should You Declare Bankruptcy?

Choosing to file bankruptcy can be a deeply personal and widely effecting business move. Before you petition the court for Chapter 7, Chapter 11, Chapter 12, or Chapter 13 bankruptcy, speak with an attorney, and go to a few financial management courses to see whether or not budgeting creatively, reallocating some of your assets and resources, and negotiating with past-due creditors may help resolve some of your troubles. After all, a bankruptcy will stay on your credit report for up to eight years, and filing can make it difficult for you to acquire the credit or good rates necessary to make mortgage purchases or even obtain large consumer lines of credit again.

If you have very few assets to your name and large amounts of consumer debt, bankruptcy may be a better alternative than working for years with a credit counseling coach and mollifying your creditors by paying off negotiated long-term arrangements. Similarly, if an illness or work-related accident has prevented you from being able to make enough money to pay your mortgage, attend to snowballing credit bills, or deal with your medical expenses (assuming your insurance has not been able to help you cover the costs), bankruptcy can liberate you from your oppressive financial circumstances.

In any event, exhaust all other remedies first. Try to borrow money from a friend or relative, if possible, to eliminate or at least reduce the amount of “red line” credit debt. Tackle your biggest priority debts first. These debts include palimony, alimony, past due notices on essential utilities, car payments, mortgage payments, and taxes.

If you need help prioritizing how to manage your debts, work with a counselor, and draw up a budget that's conservatively based around what you reasonably expect to bring in -- don't create a “wish fulfillment” budget that assumes the best case scenario for your financial future. Now is not the time for wishful thinking -- be pragmatic, and assume that not all of your best laid plans will come to fruition.

Finally, understand how bankruptcy will impact your credit and buying capacity. Do a long-term cost benefit calculus of different financial bale out strategies. For instance, predict what your life will be like if you file for bankruptcy successfully. Similarly, predict what your life will look like a few years hence if you manage your debts with a less drastic remedy.