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When Is It Time to File Bankruptcy? Everything You Need to Know

There are a lot of myths out there about bankruptcy.

The truth is, life happens and filing for bankruptcy does not mean you are financially irresponsible. Many Americans are plagued with debt from unexpected causes like medical bills.

Most people don’t know much about what filing for bankruptcy actually means. Filing for personal bankruptcy can reduce stress caused by a desperate financial situation and can give you a second chance at life.

If you are having financial trouble, you might be wondering, “when is it time to file bankruptcy?”

Knowing when you can still get your financial act together and when you should consider filing for bankruptcy can be difficult.

Keep reading for signs it’s time to file.  

When You Can’t Pay Your Bills

One of the first signs that you might need to file bankruptcy is when you can’t pay your bills.

One or two missed credit card payments won’t warrant filing bankruptcy, but if you continuously can’t pay your bills, it might be time to consider that option. If you are missing some payments in order to make other ones, you are not really getting any further ahead.

Paying your bills late is a big deal for your wallet and your credit. Missing one or two payments might be forgiven if you communicate with your lender, but perpetual lateness will not be excused.

You’ll incur late fees which will add to your debt and may even experience increased interest rates. Failing to make timely payments on your debt such as credit card debt, medical bills, and student or auto loans could result in serious damage to your credit score.

Your lender will report your loan as being in default and the consequences will snowball. 

Being unable to make payments on time is one thing, but being unable to pay at all is even worse. If your income doesn’t allow you to make even the minimum payments on your monthly bills, you should consider filing for bankruptcy.

If you can’t manage to make your monthly payments, whether, on time or late, you are in serious financial trouble. 

When You’re in Multiple Kinds of Debt

Having one major debt is relatively common. Many Americans carry a major chunk of debt from student loans, medical bills, or credit cards.

It is possible to manage one type of debt like this. However, if you carry multiple types of major debt, things might not be manageable. It’s nearly impossible to successfully juggle multiple kinds of debt.

You will have to divert your cash in several different directions. This can be complicated, not to mention confusing. It’s also unlikely to be effective.

Filing Chapter 7 Bankruptcy can bring your financial relief. 

When Your Debt Is Greater Than Your Income and Assets

You can easily asses your financial situation with a little calculation. You can use this calculation to determine whether filing for personal bankruptcy might be right for you.

Add up your debt and your annual income. Do your debts add up to more than half of your annual income? If so, the numbers are not in your favor.

When over half of your income needs to go towards paying off your debt, you are going to be living paycheck to paycheck, if you can even stay afloat.

There’s not much of a chance for financial success in the near or long-term future. 

When You Can’t Pay in Five Years

When you are considering filing for bankruptcy, you should create a budget and determine how long it will realistically take you to pay off your debts.

If this timeline is more than five years, you should consider filing for bankruptcy. You don’t want to spend your entire life in debt.

Personal bankruptcy exists for a reason. To bring financial relief to those in your situation, and to give you a second chance.

If it will take you more than five years to pay off your debt, chances are you won’t be able to manage it yourself. 

When Your Income Won’t Increase

Theoretically, your income should increase in line with your lifestyle and expenses. Unfortunately, that is not often the case in the modern economy.

Most workers expect to receive the same paycheck amount month after month and year after year. Barring a major event such as a big raise, receiving an inheritance, or winning the lottery, most workers can’t anticipate a significant pay raise.

If you are like most workers and are stuck with your current income amount, your financial situation is not going to improve. You will be struggling to make the same payments on your debts with the same amount of income.

You’re not going to make any headway on paying off your debts, so something else will need to change.

When You’ve Been Sued

If you have already been served a lawsuit because of your debt, you need to contact an attorney as soon as possible.

Many people involve an attorney when things get bad in order to prevent a lawsuit. If you owe people money, it’s just a matter of time before they sue you to get their money back.

If you find yourself party to a lawsuit because of your debt, call a lawyer right away. 

When Is It Time to File Bankruptcy?

If things are going less than well financially, you might be wondering, “when is it time to file bankruptcy?”

We hope this article has provided you some insight into the reasons people file bankruptcy to help you decide if it’s the right decision for you. If you have additional questions or are ready to start the bankruptcy process, contact an attorney.

For more financial advice, check out our blog. 

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