Filing bankruptcy gives you immediate protection from your creditors and a financial fresh start by wiping out certain debts like credit card debt, payday loans, and medical debt. If your wages are being garnished or credit card companies and payday lenders are harassing you to collect payments you can't afford to pay, filing bankruptcy may be the best way to get permanent relief. But if most of your debts are non-dischargeable, filing bankruptcy may not be worth it.
Written by the Upsolve Team.
Updated June 8, 2022
Filing Chapter 7 or Chapter 13 bankruptcy will give you immediate protection from your creditors and long-term relief by eliminatingyour credit card debt, medical debt, and most unsecured debt. If you’re subject to wage garnishment or have credit card companies and payday lenders constantly requesting payments you simply can't afford, filing bankruptcy may be the best way to get permanent relief and start fresh.
But bankruptcy doesn’t wipe out all debts. If most of your debt is non-dischargeable, filing bankruptcy may not be worth it. This article will explore the factors you’ll want to consider to decide whether or not filing bankruptcy is worth it for you.
What Is a Good Reason for Filing Bankruptcy?
Before you file a bankruptcy case, it's crucial to weigh all your options. Although bankruptcy can relieve financial stress, it also has consequences, so you shouldn't take it lightly. Remember, you can only get relief under Chapter 7 of the Bankruptcy Code every eight years. So make the most of your filing because you won’t be able to seek the same relief if an accident, illness, loss of income, or other financial hardship arises in the near future.
There are a few things to consider when it comes to filing bankruptcy. First, you’ll want to look at your finances and debt. You’ll also want to consider how these things are impacting your day-to-day life and your family.
Financial Factors To Consider When Filing Bankruptcy
First, you’ll want to look at the types of debt and the amount of debt you have. If you have more than $10,000 in dischargeable debt and you can’t keep up with the minimum payments on your debt each month, then filing bankruptcy may be worth it for you. This is especially true if a creditor or debt collector is threatening to sue or garnish your wages. Two common kinds of dischargeable debt many Chapter 7 filers face are credit card bills and medical bills.
But if you have less than $10,000 in debt and/or you’re able to pay at least the minimum payment on your monthly credit card bills and other debts, it might not be worth it to file bankruptcy at this time. That’s also true if you have a lot of debt that can’t be discharged like student loan debt, back child support or alimony payments, or recent tax debts.
Keep in mind that to file Chapter 7, you’ll have to pass the means test.
File Bankruptcy for the Emotional and Mental Benefits
Filers often find that one major benefit of filing bankruptcy is the mental and emotional relief it brings, not to mention the financial fresh start.
Getting behind on debts, bills, and other financial obligations can be extremely mentally and emotionally taxing. It can cause stress, impact your self-esteem, and even affect your relationships and your performance at work. In addition to weighing the financial consequences of bankruptcy, you should also consider the mental and emotional ones.
In addition to considering the financial factors above, bankruptcy might be worth it for you if:
You’re constantly in a high state of stress over your finances.
Your debt causes relationship problems with your significant other, children, or other family members.
You’re mentally exhausted by trying to juggle your bills and debts.
Your debt makes you feel bad about yourself or hopeless.
As soon as you file your Chapter 7 bankruptcy with the Bankruptcy Court, you’re protected from your creditors by the automatic stay. This stops all collection actions from phone calls to wage garnishments. While the Chapter 7 bankruptcy process can take several months, many filers find that the automatic stay brings mental relief since they no longer have to deal with their creditors individually.
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Is Bankruptcy Worth the Potential Consequences?
Even if it seems worth it from a financial and mental standpoint, it's essential to consider the potential consequences of bankruptcy before you file. For example, you’ll likely see an initial decrease in your credit score. However, with proper financial management, you can rebuild your credit.
Bankruptcy will also go on your public record. This means that if you apply for certain jobs, volunteer positions, or public offices, your bankruptcy will show up in a public records search. In rare cases, it may prevent you from getting a job or participating in something.
Though it’s rare in Chapter 7 cases, you could stand to lose property, including your home, vehicle, or other valuables that aren’t fully protected by exemptions. However, if you’re already at risk of losing your home or vehicle, bankruptcy might still be the best option for you and provide a way to keep them.
How To Decide if Bankruptcy Is Worth It for You
There are several things you can do to help you decide if bankruptcy if the right choice for you.
Meet With a Credit Counselor orTake a Credit Counseling Course
If you meet with an accredited credit counselor at a nonprofit counseling agency, the initial consultation is free. Credit counseling is a good way to get a sense of all your debt-relief options. This includes bankruptcy, as well as debt consolidation, a debt management plan, or debt settlement, which we’ll touch on briefly below.
Credit counseling courses have a fee of $25 to $50. You may be able to get this waived if you can’t afford it. The course provides an overview of your debt-relief options, including bankruptcy. If you take the course from anapproved provider in your state and you end up filing bankruptcy, you can use it to satisfy the required pre-bankruptcy credit counseling class. Taking the course doesn’t commit you to filing bankruptcy. But the certificate of completion you will receive will be good for six months if you decide that bankruptcy is the right option for you.
Get a Clear Sense of Your Finances
Find and organize your financial documents, including pay stubs, bank statements, and recent tax returns. Also, collect all your bills, credit card statements, communications from debt collectors, and a recent credit report. With all of this paperwork in one place, you can better understand your entire financial picture. You’ll also need all this information if you do decide to file bankruptcy.
Meet With a Bankruptcy Lawyer
Most bankruptcy lawyers offer free consultations, so if you schedule a meeting, the only cost is your time. Meeting with an attorney can help you better understand your debt relief options before your final decision. You can also look for legal aid organizations in your area that provide free or low-cost legal advice.
Research Other Debt Relief Options
Bankruptcy isn’t the only way to take care of debts that may be causing problems in your life. Depending on your financial situation, you may also want to consider one or more of the following options:
Debt settlement: Typically done through a third party that charges fees. They may be able to negotiate down the amount you owe so that you pay them less. However, it could negatively impact your credit.
Debt consolidation: Taking out a larger loan, such as a personal loan or home equity loan, to pay off all of your debts. Instead of several to deal with, all of your debts are now rolled into one loan with a potentially lower interest rate.
Debt management plan: A repayment plan is through a credit counseling agency. You pay the credit counseling agency a modest fee, and they distribute the funds from your payment to your creditors. Usually, you pay less per month than if you were paying your creditors directly.
Determining if bankruptcy is worth it for you should involve some financial calculations and also careful consideration of the mental and emotional benefits, its potential consequences, and alternatives to filing for bankruptcy.
Speaking with a seasoned bankruptcy attorney can also help answer your questions and provide some clarity. If you decide Chapter 7 is right for you and you have a simple case, you can use Upsolve’s free filing tool.