When To Consider Bankruptcy

Filing for bankruptcy is a major financial move that requires careful thought and consideration. With consumer debt at an all-time high, more Americans are finding themselves overwhelmed. In fact, a total of 370,685 personal bankruptcies have been filed in 2022 alone, and the number continues to rise to this day. But on a positive note, for some individuals, filing for bankruptcy may provide the fresh start they need to move forward. But when is filing for bankruptcy really the right choice? 

This article will guide you in weighing your options, knowing the different bankruptcy types, and considering the key factors before finalizing your decision. 

  1. Understand the different types of bankruptcy 

There are several types of bankruptcy filings. The most common options include the following: 

  • Chapter 7 bankruptcy: The total debt erase 

If you’re looking for a way to wipe the slate totally clean, Chapter 7 bankruptcy may be the way to go. This ‘liquidation bankruptcy’ erases many (though not all) of your debts completely. The court can erase credit card balances, medical bills, personal loans, and more—giving you a fresh start. 

The tradeoff is that some of your assets could be liquidated or sold off to pay back creditors. However, you do get to keep essentials like clothing, basic household items, and any property that’s exempt in your state. One big plus of Chapter 7 bankruptcy is that it only stays on your credit report for 10 years. So, while credit scores take an initial hit after filing, you can rebuild your credit over time. 

Chapter 7 makes the most sense for those lacking enough income to keep up with payments or those with few assets they need to protect. Preferably, talk to a bankruptcy attorney to get specifics on whether it fits your financial situation. 

  • Chapter 13 bankruptcy: The debt repayment plan 

If wiping all your debt away with Chapter 7 sounds too drastic, Chapter 13 bankruptcy may be a better fit, especially if you have a regular income. With Chapter 13, you get to keep your property like your home or car—in exchange for repaying some of what you owe over time. This ‘reorganization bankruptcy’ involves committing to a 3–5-year repayment plan approved by the court. How much you repay depends on your income level and debts. 

A major benefit is catching up on mortgage or car loan payments and avoiding foreclosure or repossession. Another perk is that Chapter 13 bankruptcy only stays on your credit report for seven years. So once your repayment plan is complete, your credit score starts recovering. 

If you have regular income to support consistent payments, Chapter 13 could be a good compromise to pay back debt while protecting assets. 

  • Chapter 11 bankruptcy: The business restructure 

If your business struggles with serious debt, Chapter 11 bankruptcy may be your lifeline to restructure and move forward. Just recently, in 2022, about 13,125 businesses in the US filed for Chapter 11.