Deciding to file bankruptcy is a big decision, and it’s one that many experts argue consumers wait too long to do. So, while cultural norms may be telling you to avoid bankruptcy at all costs, waiting to file may be costing you more than you know.

We asked nine experts for their perspectives about personal bankruptcy. Their answers may lead you to rethink what you “know” about filing.

When do you decide it’s time to file for bankruptcy?

Here are some telltale signs that our experts say should indicate that bankruptcy needs to be on the table.

Are you taking from retirement savings to pay off debt?

Four out of nine experts say this is the biggest cardinal sin committed by those trying to avoid bankruptcy. Pulling out retirement funds for the sake of paying off debt that would be discharged if you filed isn’t doing yourself any favors.
 

“The worst situation is where a client is spending exempt retirement funds to stay current or pay down dischargeable credit cards. This is almost always unacceptable where the client would need to be advised to file bankruptcy immediately.”
Chris Barski, Barski Law Group

Are you only able to make the minimum payments?

Erik Clark of Borowitz & Clark, LLP agrees that under no uncertain terms should someone start liquidating retirement assets to pay off debt, but there are earlier signs he says that point to trouble.

If you are only able to make your minimum monthly payments on your debt, you have already lost the war. Speak with a bankruptcy attorney and explore your options. – Erik Clark, Borowitz & Clark @bclawllp #bankruptcy Click To Tweet

“Almost all of the clients I have had regret not filing sooner once they learn about the process and how it will affect them,” he says.

Have creditors begun sending your accounts to collections?

Alexa Serrano of Finder.com points to collection accounts. Many people delay filing for bankruptcy to avoid getting the courts involved in their finances. However, if you’re facing collections, then you may end up in court anyway.
 

“Not all creditors will pass your debt to a collection agency, but if they do it’s a sign that you may want to consider filing for bankruptcy. After it has been reported to a collection agency, you’re at risk of creditors suing you.”
Alexa Serrano, Finder.com

Is borrowing money putting you further into debt?

There’s nothing wrong with a debt consolidation loan, as long as it’s not being used to put a Band-Aid on a massive wound. But oftentimes, that’s what happens, and the result ends up being more debt instead of less.

If you can't pay your current debt, and you're borrowing money to pay another creditor, you're compounding the issue. You're digging yourself into a deeper 'debt' hole. – WealthFit.com @getwealthfit #bankruptcy Click To Tweet

Are you borrowing money from family?

Owing debts to loved ones is an easy way to end those relationships. If you’re already struggling with your bills and debts, getting a loan from a family member is likely only delaying the inevitable. You’re more likely to stiff them and cause awkward family get-togethers than you are to eventually pay them back.
 

“If you find yourself considering borrowing from family, it’s time to talk to a bankruptcy attorney. You should always know your bankruptcy options, even if you aren’t ready to file yet.”
Chad Van Horn, Van Horn Law Group

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Should personal bankruptcy be a last resort?

Only three of our experts used the term “last resort” when talking about bankruptcy, and there are reasons why it gets that label.

Yes, it will be listed on your credit report. Chapter 7 is one of the longest-lasting penalties you can incur since it sticks around for ten years rather than seven. And yes, if you have assets that don’t qualify for an exemption, there’s the potential you could lose them.

However, the reality is that people who file tend to enjoy a faster credit score recovery than those who muddle along. In addition, only about 4% of people who file for personal bankruptcy end up losing assets.

Last resort shouldn’t mean the last option considered

Steve Rhode, the Get out of Debt Guy and someone who has filed for bankruptcy himself thinks the “last resort” label is misleading and can be detrimental.

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According to Rhode, “There is no first or last, just options. People should look at all their logical options, get the facts, do the math, and then make a decision about what is right for them and their specific situation.”

In this sense, if you’re having trouble with your finances, lay all your options on the table:

Waiting and hoping won’t get you anywhere

Leslie Tayne of Tayne Law Group agrees that emotions need to be taken out of the equation. But that once you realize you’re struggling, it’s time to start researching your options.

“It’s common to wait and hope things will change or hope for some event to occur that would turn the financial situation around, which ends up not happening, and then more debt accumulates,” she explains. “Educate yourself early and find out what options are available for you that make sense for your personal financial needs and not those of others.”

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Overcoming the negative emotions that can come with filing

Another important thing to keep in mind is that for many, filing bankruptcy is simply the best option on the table. If you’ve been forced into an impossible financial situation by circumstances that are beyond your control, then feelings of failure are misplaced and may be keeping you from making the right choice for your future.

Expert: Erik Clark – Borowitz & Clark, LLP

Erik Clark of Borowitz & Clark LLP
“The concept behind bankruptcy is rooted in the Bible and entrenched in our constitution. It is a right you have.  After 25 years of representing people in bankruptcy (over 40,000 people) I can tell you that having to file bankruptcy has nothing to do with how smart you are or how successful you are. It is a legal process to address a financial situation that is almost always due to unforeseen events that the consumer had no control over.”

Is the credit damage as bad as most people assume?

The seven- to ten-year credit penalty is one of the top reasons people avoid filing. Bankruptcy will be noted in the public records section of your credit report. Chapter 7 is noted for seven years and Chapter 13 for ten. However, our experts argue that the damage is not as severe in the long-term as people usually think.

Mark Scribner of oXYGen Financial points to a FICO study of consumer scores before and after a bankruptcy filing.

  • Before filing, the median score was in the 550s, and scores rose into the 560s immediately after filing
  • Two years after filing 28% of filers had scores above 620
  • Four years after 48% had scores above 620

A 620 credit score is high enough to qualify for a traditional fixed-rate mortgage with many lenders. Even when your score is in the 500s, it’s still possible to qualify for an FHA loan.

Steve Rhode also points to two Federal Reserve studies. One that found people who file for bankruptcy have a faster rate of credit recovery than those who don’t. Another found that filers’ scores rose dramatically, long before the bankruptcy notation was removed from their reports.

Rebuilding your credit quickly after bankruptcy

There are plenty of techniques that a filer can use to start improving their score long before the bankruptcy notation drops off their credit report. Leslie Tayne explains that even some debts that you keep through the bankruptcy process offer a means to start rebuilding your credit immediately.

Expert: Leslie Tayne – Tayne Law Group

Leslie Tayne of Tayne Law Group
“If you have filed for bankruptcy and reaffirmed debts that will help you, such as a car or mortgage, you would continue with your obligations. This might help your credit and show that you have kept up with payments and didn’t include it in the bankruptcy.”

You can also build a positive credit history by keeping up with payments on any debts that weren’t discharged during bankruptcy. For example, if you still have student loans to repay after discharge, then making those payments on time will help rebuild your credit.

Another popular recommendation among our experts was to find someone who would be willing to make you an authorized user on a credit card. Many credit card companies report the credit history of an account on any authorized user’s history. As long as the payments on the account are made on time, it can help your credit.

There are also secured credit cards, which only require a small cash deposit to open the account. You can qualify for these cards regardless of your credit score.

“Make small purchases and pay the balance off every month,” Erik Clark explains, “and if you have a new personal loan, or an existing mortgage or car loan, make sure all the payments are made on time.”

Also, make sure to repair your credit. Enlisting a credit repair service can help you ensure that bankruptcy notations and accounts are removed from your report on time.

“You might consider services where they monitor your credit report, initiate challenges, and make sure negative items fall off at the correct time,” explains Mark Scribner.

Will you be forced to put your life on hold?

Another concern people often have is that they will be trapped by filing.

  • What if I need to move after I filed?
  • What if I need to get a car?

The reality is that consumers can be going through bankruptcy and still find a new place to live or new transportation, assuming it’s necessary.

“There are companies that specialize in working with people in bankruptcy,” Van Horn explains. “Just be sure to get the court’s permission.

Finding a new place to live

While you can’t expect to qualify for a mortgage and buy a home while you file for bankruptcy, renting may be easier than you think.

“Filing for bankruptcy makes it more of a challenge to rent, but not impossible,” Leslie Tayne explains. She advises that while many apartment complexes may turn renters down solely based on their credit report, there are other options.

“Individual landlords are a safer bet and might be more willing to work with individuals that have filed for bankruptcy. You might need a cosigner or a bigger security deposit to secure housing with a bankruptcy ongoing or discharged and reported on your credit.”

Mark Scribner advises that there are typically other factors that are more important to landlords – namely, your rental history and a verifiable source of income.

Expert: Mark Scribner – oXYGenFinancial

Mark Scribner of oXYGenFinancial
“Typically those two factors are the biggest concerns,” he explains. “Keep in mind that most landlords will, in fact, run a credit report. So, be prepared to explain why and how you can afford the property.”

Getting a car

“Vehicle financing is still available with court approval, although the interest rates are generally not favorable,” Chris Barski advises.

There are used car dealers that specifically work with people who have bad credit or filed bankruptcy. Just be sure to carefully evaluate the cost of borrowing. Make sure you understand how a higher interest rate will affect your monthly payments and the total cost to purchase a vehicle.

However, some experts say that you need to consider other options.

“You might just have to do what the rest of us did after a financial crisis,” Steve Rhode explains, “You buy a beater car for cash. It’s not your dream car, but a crappy $2,000 car can get you back and forth to work. It’s just not a fancy ride.”

The experts at WealthFit.com also say there are other options. For instance, if you need to move, find a place as close as possible to where you work.

“If you live near your job, you can either walk or use public transportation. If you need a ride somewhere, for example, a doctor’s office, you can use ride-sharing. And if you need a car for a day, you can do so for as little as $30 per day on Turo.”

Should you be worried about the stigma?

Another reason people avoid filing is largely psychological. They worry about the stigma of filing – what will happen if and when people know they declared bankruptcy.

“About 15% of my intakes involve some form of moral aversion to the bankruptcy process which has to be addressed,” says Chris Barski. “I am aware of the stigma some people attribute to bankruptcy, but it is not generally warranted.”

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Chad Van Horn also argues that while there may have been a stigma with filing in the past, it’s been erased by economic events over the past decade.

“I believe that the stigma almost was gone after the housing bubble burst in 2008 but now it will be completely gone after COVID,” he explains.

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Barbara Weltman of Big Ideas for Small Business agrees that fear of judgment shouldn’t prevent someone from filing.

Expert: Barbara Weltman – Big Ideas for Small Business

Barbara Weltman at BigIdeasforSmallBusiness.com
“Bankruptcy is merely a process that the law allows to help people get out from under crushing debt.  Many who need this process are those with serious medical bills or debts resulting from unforeseen circumstances.”

In this light, those that do find out about your bankruptcy are likely to be empathetic, rather than judgmental.

Which chapter should you file and when?

Most consumers choosing which type of personal bankruptcy to file will look at two options – Chapter 7 and Chapter 13.

  • Chapter 7 is the quicker option of the two. It generally takes about 90-120 days to complete. Your assets are liquidated or sold and the proceeds are used to pay your creditors off. However, many assets may be exempt from liquidation – even a home or car below a certain value can be saved. In fact, only about 4% of people who file chapter 7 have any assets liquidated.[1]
  • Chapter 13 is called wage earner’s bankruptcy because it sets up a three- to five-year repayment plan. You must make monthly payments that get distributed to your creditors to pay back a percentage of what you owe. Once you complete the repayment plan the remaining balances will be discharged.

Although individuals can also file for Chapter 11, it’s highly uncommon and mostly meant for businesses. Individuals only qualify for Chapter 11 if their personal asset totals are too high to file Chapter 7 or 13.

Expert: Steve Rhode – The Get Out of Debt Guy

Steve Rhode, The Get Out of Debt Guy
“I typically lean towards the Chapter 7 route because the fresh start comes fast, the consumer is almost immediately protected from creditors and collectors, and people can get back to saving quickly.”

Of course, there are some considerations that you may need to take into account, based on your situation. Talking to a qualified bankruptcy attorney is extremely beneficial because the types of debt you have, your income, and the value of your assets will all come into play when choosing the best chapter to file.

“Chapter 13, for example, may be best if you want to save your home,” Mark Scribner explains. While many homes may qualify for an exemption, a primary residence with a high property value or a vacation home would not.

Another important consideration when filing is timing. When you file can affect your ability to discharge certain debts, such as recent credit card purchases and federal income taxes. Deciding when to file can be complex, so again a qualified personal bankruptcy attorney is your best resource.

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Weigh your options for debt relief to see if bankruptcy is the right choice.

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Article last modified on October 22, 2020. Published by Debt.com, LLC