Bankruptcy Fundamentals: When Is the Best Time to File for Bankruptcy?

November 4, 2021

Bankruptcy is a legal process in which a judge and a court trustee review the assets and liabilities of people, partnerships, and businesses whose debts have grown too large for them to pay.

The court decides whether the debts are discharged, which means that people who owe them are no longer legally obligated to pay them. The court may also dismiss the action if the person or business has sufficient assets to pay their debts.

Bankruptcy rules were enacted to allow people to restart their lives after their finances had crumbled. Whether the collapse was caused by poor decisions or bad luck, politicians may see that in a capitalist economy, a second chance is a critical safety net.

The good news for anyone who is on the fence about filing for bankruptcy is that practically everyone who does so is given a second chance. But how do you know when it’s time to call it quits and declare bankruptcy?

Your Financial Situation

What Is the Best Way to Evaluate Your Financial Situation?

Here are some questions to help you determine where you are in your financial danger zone:

  • Do you merely pay the bare minimum on your credit cards?
  • Are you getting phone calls from debt collectors?
  • Do you feel afraid or out of control when you think about organizing your finances?
  • Do you pay for basics with a credit card?
  • Are you thinking about consolidating your debts?
  • Do you have any doubts about how much you owe?

If you responded yes to two or more of the questions above, you should at the very least think about your financial condition. Simply defined, bankruptcy occurs when you owe more money than you can pay.

Who Declares Bankruptcy

Most people and businesses who filed for bankruptcy owe significantly more money than they have, and this situation is unlikely to change very soon. 

Bankruptcy filers owing $86 billion and had $56 billion in assets in 2020. The majority of such assets were real estate holdings, the value of which is up for debate.

When you have enough money to pay off your debts but need to alter the conditions, bankruptcy can be a useful financial planning tool. This is common in situations where people must settle mortgage arrears or taxes in a structured manner.

What’s shocking is that individuals, not corporations, are the ones who file for bankruptcy the most frequently. They owe money on a mortgage, a credit card, an auto loan, or a student loan – possibly all four! – and don’t have the financial means to cover it.

In 2019, a total of 774,940 bankruptcy cases were filed, with individuals filing 752,160 of them. Businesses filed only 22,780 bankruptcy cases in 2019.

The fact that the majority of those declaring bankruptcy were not especially wealthy is another surprise. Those who filed Chapter 7 had a median income of $31,284. With a median income of $41,532, Chapter 13 filers didn’t do much better.

Part of comprehending bankruptcy is realizing that, while it provides an opportunity to start over, it has a significant impact on your credit and capacity to use money in the future. It may avoid or delay home foreclosure and car repossession, as well as wage garnishment and other legal actions taken by creditors to recover debts.

How Do I Declare Bankruptcy?

There are two basic ways to go insolvent. The more typical option is to file for bankruptcy on your own. Creditors can also petition the court to declare a person bankrupt.

There are various options for filing bankruptcy, each with its own set of benefits and drawbacks. Before proceeding, you should speak with an attorney to determine which option is best for your situation.

Types of Bankruptcy

Filing for Chapter 7 Bankruptcy

People apply for Chapter 7 bankruptcy for a variety of reasons. Whatever your reason, you’re most likely not alone. Unemployment, big medical bills, severely overextended credit, and marital issues are all major causes for filing for bankruptcy. 

A Chapter 7 bankruptcy, sometimes known as a “clean bankruptcy,” liquidates your assets in order to pay off as much of your debt as feasible. Creditors, such as banks and credit card firms, receive the cash from your assets.

You will receive a discharge notice in four months. Your bankruptcy will be recorded on your credit report for ten years. Even so, it doesn’t have to spell disaster. 

Many Chapter 7 filers have purchased homes while having just filed for bankruptcy. Chapter 7 provides a fresh start for many people.

However, Chapter 7 bankruptcy isn’t for everyone. To repay creditors, almost all assets are confiscated and sold. 

If a debtor wants to keep a business, a family home, or any other personal assets, Chapter 7 may not be the best option.

Filing for Chapter 13 Bankruptcy

Filing a Chapter 13 bankruptcy may be a preferable option for folks who want to keep their property.

A reorganization bankruptcy is also known as a Chapter 13 bankruptcy. Chapter 13 allows people to pay off their obligations over a three-to-five-year period. 

Chapter 13 provides a grace period for people who have a stable, predictable annual income. Any outstanding debts are discharged at the end of the grace period.

Creditors must stop contacting the debtor after the bankruptcy is approved by the court. Bankrupt persons can then work and pay off their debts over the next few years while keeping their property and belongings


It’s difficult to admit you need help or that you can’t do it alone when you’re in debt. However, our government has bankruptcy laws in place to protect both creditors and individuals. 

If you’re dealing with a stressful debt situation, it’s time to face the truth. Perhaps you’ve been attempting to ignore the ringing phone and the mounting pile of unpaid bills.

However, if you do not file for bankruptcy, you may be doing yourself a disservice. Filing bankruptcy, with the help of a qualified lawyer and the correct knowledge, may provide you with the financial foundation you need to establish a fresh start. 

To put it another way, throwing in the towel might just be the start you need.