When it comes to personal finance, think of filing for bankruptcy as the nuclear option. It’s a last resort. If you’re stuck in an impossible financial situation – besieged by creditors, going deeper into debt every month, and raiding your retirement savings or borrowing from family just to stay afloat – then bankruptcy will let you erase some or all of your debts, and start your life fresh.
After all, companies do it all the time. But on a personal level, the nuclear option comes with serious consequences. Your credit record will be trashed for years, making it difficult or even impossible to qualify for mortgages, car loans or credit cards. So only look into it when you’ve exhausted all other options.
If you can address your budget shortfall by overhauling your monthly expenses, for instance, then that’s what you need to do. Get rid of that second car, refinance your mortgage at a lower rate, trim all non-critical spending, find a cheaper apartment if you’re renting, or sell your home and move to a smaller place until you’re back on your feet.
If even extreme measures won’t make a dent in your debt load, though, then it’s time to consider bankruptcy. It’s not as breezy a process as it was years ago, before new regulations kicked in. These days you’ll need to get credit counseling (out of your own pocket), and undergo means testing to make sure your income doesn’t surpass certain levels.
So-called Chapter 7 bankruptcy is the more extreme option, getting rid of most of your debts entirely (except those that can never be wiped away, like child, spousal support and some types of school debt). As a result creditors might come after everything you own, like your home or car, so it’s a better fit for those who have virtually no assets. Chapter 13 is a less-severe solution: those with a steady income can keep their home and car, but have to file a repayment plan with the courts, so debts get paid back eventually over three to five years.
A bankruptcy lawyer can help you navigate the process (find one at nacba.org/attorneyfinder), and a trustee will decide the case. A Chapter 7 filing will stay on your credit record for a decade, and Chapter 13 for about seven years. But if it’s delivering you from a financial situation that was destroying your family’s future, then filing for bankruptcy is at least worth a look.