Knowing When To Declare Bankruptcy

How can you tell if you've hit financial rock bottom?

We've probably all thought about it at one time or another: and declaring bankruptcy. Most of us can relate to the stress of unpaid bills, mounting debts and the feeling that we just can't get ahead, no matter what we do. Some people see bankruptcy as financial suicide, and therefore would never even contemplate it; others see it as an easy fix to a long-standing and systemic spending problem.

So what's the truth?

Well, make no mistake about it: declaring bankruptcy will leave your credit rating in tatters - at least for a while. People who have gone through it say that bankruptcy puts a serious crimp in any attempt to improve their net worth through wise borrowing. Not to mention, since 2005 new bankruptcy laws have officially made it more difficult for both individuals and businesses to hop on to the insolvency bandwagon.

So whether you're looking to file Chapter 7 or Chapter 13 (the two most common forms of bankruptcy), it's an enormous decision that you should not take lightly. But what some people may not realize is that you actually do yourself a disservice by notdeclaring when you really ought to.

Here are a few of the signs to watch for:

  • Unpaid (and insurmountable) medical bills. Sadly, 45 million Americans are living without any kind of health insurance, and so a serious injury or prolonged illness can lead many of them to insolvency. If you have looked at your medical bills and realized that that there is no foreseeable way to pay them off, bankruptcy may be the solution for you.
  • Revolving credit card debt. While this concept traditionally means taking on a new credit card (often with an enticing introductory interest rate) to pay the debts off an older one, it has now evolved to mean taking on a new credit card simply to continue spending once you've maxed out your old ones. Eventually, you're going to run out of cards to apply for. And then the minimum monthly payments will start adding up. And then all those interest rates are going start gnawing away at your net worth. And then you're in big trouble.
  • You're resorting to, or thinking of resorting to, payday lenders. Payday loans are the absolute worst kind of borrowing you can do, shy of turning to your local loan shark syndication. You are better off declaring bankruptcy and wiping the slate clean rather than turning to these barely legal lending outfits that prey on the poorest of America's low-income communities.
  • You have exhausted every other possible avenue to dealing with your debts. And that includes cutting up your cards, getting a second job, selling off any fixed assets you have, consolidating your debts and asking your parents to bail you out.

And while you may not be thinking in these terms if faced with the collapse of your personal finances, here's something else to keep in mind: by resorting to bankruptcy, you are essentially screwing the lenders out of the money they decided to provide to you. It's a big declaration to the world, and to yourself, that you can no longer handle the consequences of your actions.

In the end, there's not much to gain from turning to bankruptcy unless the experience helps to alter your relationship with money. If it doesn't, you could very well find yourself back in the same situation again. The good news is, repairing your credit after bankruptcy is easier than you might think.

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