If you are experiencing financial problems, you may be wondering if personal bankruptcy is the right solution for you.  When considering personal bankruptcy, you should always remember that personal bankruptcy is an extreme measure, and it will profoundly negatively affect your credit rating – at least in the short term.  With that in mind, I would recommend personal bankruptcy only if you meet one or more of the following criteria:

1.    You owe more than $15,000 in unsecured debt.

This number is somewhat arbitrary, but it is intended to balance the benefits of a personal bankruptcy against the costs.  For one thing, personal bankruptcy is expensive.  If you file a Chapter 7, you can expect to pay about $2,000 in legal, filing, and other fees.  A Chapter 13 will cost more.  You also have to consider that a personal bankruptcy will stay on your credit report for 7-10 years depending on the type of case you file.  You really should not consider taking this step unless you are going to discharge a large amount of debt.

2.    You have made a genuine attempt to reduce your debt and have failed.

This is important.  If you can pay your outstanding debt by simply reducing your spending or perhaps liquidating some unused property, you should probably do this instead of filing for personal bankruptcy.  Before you consider a personal bankruptcy filing, you should prepare a detailed debt management plan.  This will allow you to determine whether personal bankruptcy is necessary or not.

3.      Your debt is increasing despite your efforts to reduce it.

Frequently, people find themselves making minimum payments on credit accounts but then having to use credit to pay for unexpected and incidental expenses, like new brakes for the car or that anniversary dinner.  If you are in this category, you may notice that your debt continues to increase.  It does not take much imagination to know where such a trend will end.  You can not keep it up.

4.    You are liquidating your retirement savings to make ends meet.

If this is your situation, you need to stop immediately.  Your retirement savings are protected in bankruptcy.  If you are spending this money to meet your regular expenses, you are not improving your finances.  You are merely delaying bankruptcy.  Under those circumstances, it is better to file now and preserve your retirement money than to spend it all and then end up filing for bankruptcy anyway.

5.    You are in danger of losing your home.

If you are a homeowner, and you are facing foreclosure, bankruptcy can help you keep your home.  As soon as you file for bankruptcy protection, an automatic stay attaches to any legal proceedings currently pending against you.  That means you will have stopped the foreclosure process.  This may give you the breathing room you need to get your finances together, make a deal with the bank, and save your home.

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