According to Experian, the average American owes roughly $97,000 in debt. Bankruptcy might appear as a beacon of relief if you are facing a horizon filled with financial stress.
However, you should not take the decision to file for bankruptcy lightly. How do you know if bankruptcy is the right choice for you?
Reasons to consider bankruptcy
Bankruptcy might be a good option if you are grappling with severe financial difficulties:
- Medical debt. Unexpected health issues can lead to high medical bills that are impossible to pay off, especially if you have too little or no insurance.
- Job loss. Losing a steady source of income can make it difficult to keep up with bills and other financial obligations, leading to increasing debt. In cases of prolonged unemployment, filing for bankruptcy might be necessary. Even if you are still employed, a significant pay cut can make it challenging to manage your debts.
- Credit card debt. Over-reliance on credit cards often leads to high-interest debt that can quickly spiral out of control. When minimum payments barely cover the interest and the principal balance remains virtually unchanged, bankruptcy can be an effective way to address this kind of debt.
- The legal fees, combined with the cost of setting up a new household, can lead to substantial debts. If one party gets saddled with shared debt that they cannot manage, they might consider bankruptcy.
Bankruptcy can provide a way out if you are drowning in dischargeable debt with no feasible way to repay it.
Understanding dischargeable and non-dischargeable debts
Bankruptcy can discharge many types of debt. These typically include credit card debt, medical bills, past-due utility bills and personal loans. This means you are no longer legally obligated to pay these debts.
However, you cannot discharge all debts through bankruptcy. Examples of non-dischargeable debts include most student loans, child support and alimony obligations, certain tax debts and debts resulting from personal injury caused by driving under the influence. These debts remain your responsibility even after bankruptcy.
The impact of bankruptcy on future finances
It is important to consider that bankruptcy remains on your credit report for seven to 10 years. This can make it challenging to obtain credit, buy a home or even get a job. However, it is possible to rebuild credit over time, and many companies offer secured credit cards and financing options to individuals who have recently filed for bankruptcy.
Determining if bankruptcy is the right choice depends on your financial situation, the type of debts owed and your ability to pay back those debts. By understanding the full implications, you can make an informed decision about whether bankruptcy is the best course of action for your financial future.