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When to File Bankruptcy

Updated on July 12, 2010

When to File Bankruptcy

Once you have determined whether you should file for bankruptcy, the next step is to decide when to file. Filing too early can prompt the need to file bankruptcy multiple times, while filing bankruptcy too late could destroy your credit history even further.

When Your Liabilities Exceed Assets

If your total debts exceed your total assets, bankruptcy may be the way to go. This doesn’t just mean that your income isn’t enough to cover your expenses; rather, your total combined debt significantly exceeds all of your liquid assets. Think of it this way: if you were to sell everything you owned -- your house included -- would you have enough money to pay off all of your debts in full? If the answer is yes, then you should review some of the alternatives to bankruptcy to see what other options are available to you. If the answer is a resounding no, it might be time to file bankruptcy.

When Your Creditors Refuse to Negotiate

Many debt management guides suggest negotiating with your creditors to reach a debt settlement -- and for a good reason. Creditors would rather you paid back some of your debt instead of paying nothing at all. Even a few hundred dollars towards a $2,500 debt would be better than nothing, right?

Unfortunately, some creditors just won’t negotiate, regardless of the circumstances. If you cannot reach a debt settlement with your creditors -- assuming you are making fair offers, of course -- try mentioning your plans to file bankruptcy. If that doesn’t work, then it may be time to actually file.

When You Are Facing Foreclosure

If you are seriously considering bankruptcy, you are likely also very close to losing your home to foreclosure. In fact, many consumers who file bankruptcy are homeowners who are trying to save their homes. If you fit this description, and you have already tried everything to avoid foreclosure, then filing for bankruptcy may be your best bet.

When You Know You Won’t Incur Anymore Debt

Arguably, one of the biggest bankruptcy mistakes that consumers make is filing for bankruptcy in anticipation of incurring a massive debt. This mindset likely arose from the mistaken belief that filing bankruptcy now will somehow protect your against future debts later. This is false; in fact, filing bankruptcy now when you know you are about to incur even more debt is a great way to set yourself up for complete disaster.

Wait until you have received notice of every single debt you anticipate. Once you are sure you have no more incoming debt -- including medical bills and legal expenses -- then you can initiate your bankruptcy. This way, you can include all of your debts when you file bankruptcy the first time and eliminate the need to file bankruptcy again in the future.

When You’ve Exhausted Every Alternative

Too many consumers jump right into bankruptcy without so much as considering their other options. Bankruptcy is a very big step, and if there is any way for you to avoid it -- even if you have to make a few sacrifices -- do it. Bankruptcy can put your life on hold for 10 years, which means no mortgage, no auto loans, and no credit cards until that time lapses. The last thing you want to do, especially if you are still in your 20’s, is push yourself so far backwards. Do some research and learn more about the available alternatives to bankruptcy before you make your final decision.

If you truly have no other possible options, and there is absolutely no way you can dig yourself out on your own, then it is time to file bankruptcy.

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