When Is Bankruptcy Filing a Good Idea

Many people see bankruptcy filing as financial suicide. It's a black mark that sticks around on your credit report for 7 or 10 years, depending on the bankruptcy laws for each respective type of bankruptcy. However, some people are in such dire financial straits that filing bankruptcy might the best solution. When is filing bankruptcy a good idea?

Consult a Professional Before Filing Bankruptcy
Bankruptcy laws vary. If you can repay your debts over time, you might want to consider a Chapter 13 bankruptcy. Chapter 13 bankruptcy is sometimes called a debt restructuring plan, and that's a good summary of what it does; you use your wages to repay your existing debt over a period of time and keep most of your assets. A Chapter 7 bankruptcy, on the other hand, wipes out most debts completely, but the court may seize and liquidate any non-exempt assets to pay your debt. However, many types of debts cannot be discharged through a bankruptcy, including student loan debt, federal tax bills, spousal support and child support.

When It's a Good Idea
In many cases, filing bankruptcy is never a good idea. However, if you're young, filing bankruptcy doesn't have quite the impact as it would later in life; if you're in your early twenties, a bankruptcy could be off your credit report entirely by the time you reach your early thirties. Conversely, if you've reached a point later in life where you have many assets or a good income, you probably want to try to avoid filing bankruptcy; you're more likely to want to buy a new house, get a new car loan or even just protect your assets in a way that you can't under most bankruptcy laws.

Income is another factor in filing bankruptcy. Low wage-earners may stand a poor chance of repaying significant debt. If you earn at or below the average income of your state, and you can afford to make only minimum payments on thousands of dollars of debt, repaying the debt could be an undue hardship. If you're having trouble paying rent or utilities, or having enough money left over for everyday living expenses, filing bankruptcy could be the break you need to get back in control of your life.

When You Should Avoid Filing Bankruptcy
Filing bankruptcy can make it virtually impossible to get a home or auto loan, and it can even be a strike against you if the dream job you've always wanted requires a credit check. If you're planning a significant life event, avoid filing bankruptcy. When filing bankruptcy, you should include sufficient recovery time for your credit report before you'll want to engage in significant life activities.

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