Experts: How To Know When It’s Time To File for Bankruptcy (2023)

Net Worth / Bankruptcy

By Nicole Spector January 31, 2023

Experts: How To Know When It’s Time To File for Bankruptcy (2)

FuzzMartin / Getty Images

(Video) This is When Filing Bankruptcy is Your Best Option

Bankruptcy. It’s a word that evokes dread in many Americans. Why? Because it may feel like the end of the road, the last resort, the end, in a way, of the game of debt.

See the List: GOBankingRates’ Best Banks of 2023
Read: Protect Your Financial Future With Gold and Silver
Also See: How Much Americans Have in Their Savings Accounts in 2023

But how does one know it’s time to file for bankruptcy? What happens when you file for bankruptcy and how does it impact your overall financial picture and existing assets? And finally, how can you rebound financially after filing?

More From Your Money: Choose a high-interest saving, checking, CD, or investing account from our list of top banks to start saving today.

GOBankingRates consulted experts to get a full understanding of the big picture of filing for bankruptcy in terms of when to do it, how it affects your finances and how you can recover.

When To File for Bankruptcy: The Telltale Signs

Filing for bankruptcy is a monumental decision that should be considered only when you’re in dire straits and you have no other way out of debt.

Make Your Money Work Better for You

(Video) July 15: How to Know it's Time to File Bankruptcy

“[Bankruptcy] should only be considered after many other options have been considered, including debt consolidation or negotiating with creditors,” said Meredith Lepore, editor of Credello.

She said these are the deciding factors for bankruptcy filings: you have no assets or income, you owe money you cannot pay, you are being harassed by creditors, you are facing foreclosure or property repossession, you have too much high-interest credit card debt or medical bills or you have gone through divorce or suffered a serious illness.

Keep in mind that you should have a goal when you’re filing for bankruptcy.

“Bankruptcy should be considered as a way to control your debt and keep creditors off your back,” Lepore said.

How Bankruptcy Affects Your Financial Status and Assets

Bankruptcy is scary for a reason. It hurts your credit score — but it’s important to note that any damage bankruptcy does to you is more like icing on an already damaged cake. You’ve already incurred harm by being in long-term debt and collections.

Make Your Money Work Better for You

(Video) Expert California Bankruptcy Attorney | Nicholas Gebelt

“Filing bankruptcy will cause your credit score to decrease in the short term and can raise interest rates on car loans and other types of credit,” said Keith Rucinski, CPA, JD, at Chapter 13 Trustee in Akron, Ohio. “However, the damage to your credit score and credit history is done long before you file for bankruptcy. Creditors have already reported delinquent accounts to the credit bureaus.”

A Bankruptcy Lawyer Can Help

You are afforded some protection, though, via certain U.S. laws that a bankruptcy attorney can walk you through.

More From Your Money: Choose a high-interest saving, checking, CD, or investing account from our list of top banks to start saving today.

“Bankruptcy laws include federal and state laws on exemptions,” Rucinski said. “These exemptions can protect your assets from legal actions by creditors. These laws can help protect your home, car, wages and retirement funds. U.S. bankruptcy laws are designed to help honest people who are having financial difficulties obtain a fresh financial start.

“An experienced bankruptcy attorney can help you determine what exemptions are available in your state to protect your assets. Chapter 13 is a bankruptcy option to help people retain their assets and make up missed payments to creditors over a three- to five-year time period.”

Make Your Money Work Better for You

(Video) What You Should Not Do Before Filing For Bankruptcy | Ask The Experts

Getting Back on Your Feet

Once you file for bankruptcy, you may be feeling ensconced in doom and gloom. Take a deep breath and remember that there is a road to rebuilding your credit score and financial health. Follow these steps:

  • Check your credit report and monitor your credit score. “It’s essential to take an in-depth look at your credit report,” Lepore said. “Spotting potential issues and coming up with a plan is a must. By monitoring your credit score, you can decipher which factors you should focus on to improve your score. If you are spread too thin, consider debt consolidation.”
  • Practice good credit habits. “Making regular, on-time payments and not overextending your credit are two key habits for establishing a healthy credit score,” Lepore said. “Taking the time to build up from small amounts of borrowing is essential if you want positive long-term results.”
  • Get a secured credit card. “Getting a secured credit card can help you rebuild your credit after bankruptcy by allowing you to establish a positive payment history,” Lepore said. “You put down a cash deposit which is usually equal to the credit limit on the card, and this then serves as collateral. As you use the card and make your on-time payments, the lender will report your activity to the credit bureaus, which can help improve your credit score. And if you are making your payments in full each month, this will also show the lenders that you are responsible with credit. Plus, a secured credit card can also help you to improve your credit utilization ratio. A low credit utilization ratio is another positive point for creditworthiness.”
  • Credit-builder loans. “Credit-builder loans also help you establish a positive payment history,” Lepore said. “These loans typically have small amounts and are used to make regular payments over a set period. As you make on-time payments, the lender will report your activity to the credit bureaus, which can help improve your credit score.”
  • Consider a co-signer. “A co-signer is also a viable option for helping to build your credit score,” Lepore said. “If your credit score is not strong enough, consider adding a co-signer to the loan who has a better credit score. Be aware that co-signers are responsible for the loan if you stop payments, meaning that their credit history and score will be impacted as well. Make sure you have good communication with the co-signer when it comes to payments.”

There is light at the end of the tunnel, though it will take some time — typically about 18 to 24 months — to build back your credit, Lepore said.

You Are Not Alone

Though surely not the most popular thing to do, filing for bankruptcy is not exactly rare, either. According to statistics from the Administrative Office of the U.S. Courts, there were 383,810 annual bankruptcy filings in September 2022 — down from 434,540 cases in 2021. This should give people some comfort in knowing that, if they’re filing for bankruptcy, they’re far from alone.

Additionally, consumers should know that it is not fancy cars and lavish mansions driving bankruptcy filings in America; it’s actually hospital bills. According to a recent study from Debt Hammer, medical debt is the No. 1 cause of bankruptcy.

More From GOBankingRates

  • All the States That Don't Tax Social Security
  • Explore GOBankingRates' 2023 Banking Resource Center
  • The 10 Best Rewards Credit Cards for 2023
  • How To Save Money When Filing Taxes

About the Author

Nicole Spector
(Video) Ask The Experts | Bankruptcy Solutions

Nicole Spector is a writer, editor, and author based in Los Angeles by way of Brooklyn. Her work has appeared in Vogue, the Atlantic, Vice, and The New Yorker. She's a frequent contributor to NBC News and Publishers Weekly. Her 2013 debut novel, "Fifty Shades of Dorian Gray" received laudatory blurbs from the likes of Fred Armisen and Ken Kalfus, and was published in the US, UK, France, and Russia — though nobody knows whatever happened with the Russian edition! She has an affinity for Twitter.

Learn More


What is the downside of filing for bankruptcy? ›

You could lose assets of value

Depending on which type of bankruptcy you qualify for, your income, the equity in your assets and other factors, you may lose your home, your car and other valuable items. Your trustee may be required to sell these items to repay your creditors.

Does bankruptcy clear all debt? ›

Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy.

What is the success rate of Chapter 7 bankruptcy? ›

If you file Chapter 7, the success rate for discharging unsecured debts (like credit cards) is an astounding 95.3%. You also should be aware that not everyone qualifies for Chapter 7 or Chapter 13 bankruptcy and there are some negative repercussions for having credit card debt discharged.

Is it OK to file bankruptcies? ›

The bottom line is that it's not bad to file for bankruptcy if that's the best form of debt relief for you. Bankruptcy has many upsides that aren't well known: It gives you a fresh start financially and wipes out unsecured debts you may not be able to pay off in your lifetime.

At what point is bankruptcy a good idea? ›

If you have large debts that you can't repay, are behind in your mortgage payments and in danger of foreclosure, are being harassed by bill collectors—or all of the above—declaring bankruptcy might be your answer.

How much debt should you be in to file bankruptcy? ›

There is no minimum debt to file bankruptcy, so the amount does not matter. Examples of unsecured debts include credit card debt, cash advance (payday) loans, and medical bills. Secured debts: If you are behind on a house or car payment, this may be a very good time to file for bankruptcy.

What debts Cannot be forgiven in bankruptcy? ›

Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.

What debts are exempt from bankruptcy? ›

Debts Never Discharged in Bankruptcy

Alimony and child support. Certain unpaid taxes, such as tax liens. However, some federal, state, and local taxes may be eligible for discharge if they date back several years. Debts for willful and malicious injury to another person or property.

What are 5 types of debt that are not dischargeable in bankruptcy? ›

Non-Dischargeable Debt in Bankruptcy
  • Debts left off the bankruptcy petition, unless the creditor actually knew of the filing.
  • Many types of taxes.
  • Child support or alimony.
  • Debts owed to a child or ex-spouse arising from divorce or separation.
  • Fines or penalties owed to government agencies.
  • Student loans.
Oct 18, 2022

What are the downsides to Chapter 7 bankruptcy? ›

Non-dischargeable Debts

Secured debts, such as mortgages, student loans, and auto loans are not discharged by Chapter 7. Moreover, the bankruptcy does not provide relief from financial obligations, such as child support, alimony, and government taxes.

How much does a lawyer charge for Chapter 7? ›

With an attorney, an average Chapter 7 case can cost anywhere from $1,500 to $3,000. An average Chapter 13 case will run you from $3,000 to $4,000.

What would disqualify me from Chapter 7? ›

5 Reasons Your Bankruptcy Case Could Be Denied

The debtor failed to attend credit counseling. Their income, expenses, and debt would allow for a Chapter 13 filing. The debtor attempted to defraud creditors or the bankruptcy court. A previous debt was discharged within the past eight years under Chapter 7.

Does the IRS know when you file bankruptcies? ›

A bankruptcy filing will "stay" (or stop) many different government actions against a bankruptcy debtor, such as a court judgment or a lien. This doesn't include IRS audits, though.

Why do so many Chapter 13 bankruptcies fail? ›

Why Do Chapter 13 Bankruptcies Fail? Some fail because filers do not adequately plan for the budgeting that helps people make it through these plans. Further, job loss or other financial catastrophes can affect a person's ability to make Chapter 13 plan payments.

Do bankruptcies clear personal loans? ›

Personal loans work like credit cards, and are discharged in bankruptcy. The same general exceptions apply to personal loans as do to credit cards. Payday loans are generally unsecured, and are discharged in bankruptcy.

Does bankruptcy help you or hurt you? ›

Bankruptcy may help you get relief from your debt, but it's important to understand that declaring bankruptcy has a serious, long-term effect on your credit. Bankruptcy will remain on your credit report for 7-10 years, affecting your ability to open credit card accounts and get approved for loans with favorable rates.

Is bankruptcy a smart idea? ›

If you're struggling, check out your options for debt relief. But bankruptcy may be the best option if your consumer debt — the kinds listed above that can be erased — equals more than half your income, or if it would take you five or more years to pay off that debt even with extreme austerity measures.

Is it better to file bankruptcy or just not pay? ›

Bankruptcy frees you from debt collection, but the headaches can linger for years. Debt settlement without bankruptcy can take more time but — if negotiated properly — can do less damage to your credit. Debt settlement stays on your credit report for seven years, but has less negative impact on your credit score.

Which bankruptcy eliminates most debts? ›

Chapter 7 Bankruptcy Discharge Wipes Out Most Debts Forever

credit card debt. medical bills. personal loans and other unsecured debt.

What is a typical credit score after bankruptcy? ›

Generally, your credit score will be lowered by 100 points or more within two to three months. The average debtor will have a 500 to 550 credit score. It may be lower if the debtor already had a bad score before filing. In summary, your credit score won't be that great after Chapter 7.

What are three things you Cannot file bankruptcy? ›

No matter which form of bankruptcy is sought, not all debt can be wiped out through a bankruptcy case. Taxes, spousal support, child support, alimony, and government-funded or backed student loans are some types of debt you will not be able to discharge in bankruptcy.

What gets forgiven in bankruptcy? ›

Chapter 7 bankruptcy erases or "discharges" credit card balances, medical bills, past-due rent payments, payday loans, overdue cellphone and utility bills, car loan balances, and even home mortgages in as little as four months.

Is filing Chapter 7 worth it? ›

The undeniable upside to filing for Chapter 7 bankruptcy is the debt relief it provides. It has the power to lift a major burden off your shoulders in just a few months. Most unsecured debt can be discharged, including credit cards, medical bills, and personal loans.

Is Chapter 7 or 13 worse? ›

Chapter 7 stays on your record for 10 years, while Chapter 13 stays for seven years. That would seem to suggest that Chapter 7 is worse for your credit score, but with Chapter 7, your debt, or at least the unsecured debt, will be gone. That means you can try to start rebuilding it immediately.

What are some potential positive outcomes of filing for bankruptcy? ›

Some of the positive effects that you will experience upon completion of your Chapter 7 bankruptcy are as follows: All of your eligible unsecured debt will be discharged. Therefore your debt to income ratio will be improved. This is one of the factors that raises your credit score.

How much cash can I have in Chapter 7? ›

If you declare bankruptcy, will you lose literally every dollar that you have in your savings? The answer is no: some cash can be exempted in a Chapter 7 case. For example, typically under Federal exemptions, you can have approximately $20,000.00 cash on hand or in the bank on the day you file bankruptcy.

What is the minimum amount of debt for Chapter 7? ›

No minimum amount of debt is required to file for either Chapter 7 or Chapter 13 bankruptcy. Still, it's important to think carefully about your financial situation and all of your options before taking such a significant step.

Should I stop paying bills before Chapter 7? ›

Under both Chapter 7 and Chapter 13 bankruptcy, your discharge will wipe out credit card debt. Therefore, you should stop paying credit card bills if you are about to file for bankruptcy to avoid wasting your money.

Can you borrow while in Chapter 7? ›

During a Chapter 7 bankruptcy, a court wipes away your qualifying debts. Unfortunately, your credit will also take a major hit. If you've gone through a Chapter 7 bankruptcy, you'll need to wait at least 4 years after a court discharges or dismisses your bankruptcy to qualify for a conventional loan.

Can you withdraw money before filing bankruptcies? ›

You are allowed to spend the money you have before filing your case. Although that may sound a bit strange, the bankruptcy law and exemptions exist to protect you. Your goal should be to set yourself up for the best possible fresh start after bankruptcy by using the funds you have wisely.

Do you receive money when you file bankruptcies? ›

Money that you are legally entitled to receive may include: money owed to you; bonuses that are contractually guaranteed; insurance proceeds from a pre-bankruptcy claim; and tax refunds. It may also include inheritance money. Tax refunds are the most common type of money received after filing bankruptcy.

Will I lose my tax refund if I file Chapter 7? ›

Federal Tax Refunds During Bankruptcy

You can receive tax refunds while in bankruptcy. However, refunds may be subject to delay, to turnover requests by the Chapter 7 Trustee, or used to pay down your tax debts.

Does Chapter 11 Wipe Out IRS debt? ›

If you successfully complete your bankruptcy plan you will receive a discharge of debt. A discharge releases you (the debtor) from personal liability for certain dischargeable debts. Some taxes may be dischargeable. Whether a federal tax debt may be discharged depends on the unique facts and circumstances of each case.

Can I have a credit card while in Chapter 13? ›

Yes. Credit cards, vehicle loans, and even residential mortgage loans can be obtained during a chapter 13 case.

Does Chapter 13 wipe out all debt? ›

The discharge releases the debtor from all debts provided for by the plan or disallowed (under section 502), with limited exceptions. Creditors provided for in full or in part under the chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.

Can you walk away from a Chapter 13? ›

You might be able to get out of Chapter 13 bankruptcy early if you can pay off your debt or you prove a financial hardship. When you enter into a Chapter 13 case, you agree to pay all of your disposable income for either 36 or 60 months. Because of this arrangement, it isn't easy to get out early.

Can I build credit after bankruptcies? ›

You can work on building credit after a bankruptcy by disputing any errors on your reports, taking out a secured credit card or loan, having your rent payments reported to the consumer credit bureaus or becoming an authorized user on someone's credit card.

What is the average credit score after Chapter 7? ›

Generally, your credit score will be lowered by 100 points or more within two to three months. The average debtor will have a 500 to 550 credit score. It may be lower if the debtor already had a bad score before filing. In summary, your credit score won't be that great after Chapter 7.

How long does it take to recover from Chapter 7 bankruptcy? ›

A Chapter 7 bankruptcy will generally remain on your credit report for 10 years. You can use that time to rebuild credit, including opening a secured credit card, consistently making on-time payments for utility bills, and using Experian Boost to ensure those payments are being reported to credit agencies.

How long does it take to build your credit after Chapter 7? ›

Most experts say it will take 18 to 24 months before a consumer with re-established good credit can secure a mortgage loan after discharge from personal bankruptcy. Credit-impaired borrowers should prepare to pay interest rates that are two to three points over conventional rates.

Is it hard to get Chapter 7? ›

Even if you are in dire financial straits, Chapter 7 may not be for you. Applicants must clear assorted hurdles before a bankruptcy court approves the filing. Among them: As mentioned above, applicants must complete a debt counseling course with an approved credit counseling agency no more than 180 days before filing.

Do you lose all credit cards after Chapter 7? ›

You'll likely have to give up all of your credit cards if you file for Chapter 7 bankruptcy, but you can start rebuilding your credit once your case is closed. If you file for Chapter 7 bankruptcy and are hoping to hang onto one of your credit cards, you will likely be out of luck.

Can I buy a car after filing Chapter 7? ›

While you can purchase a car after bankruptcy, you should expect to pay a higher interest rate if you take out a loan. Although waiting for your credit score to improve can lower your rate, it's not always possible. Research all of your lending options before you take out a loan.

How long does it take to get a 700 credit score after Chapter 7 bankruptcy? ›

By continuing to pay all of your bills on time, and properly establishing new credit, you can often attain a 700 credit score after bankruptcy within about 4-5 years after your case is filed and you receive a discharge.

Can creditors come after you after Chapter 7? ›

Can a debt collector try to collect on a debt that was discharged in bankruptcy? Debt collectors cannot try to collect on debts that were discharged in bankruptcy. Also, if you file for bankruptcy, debt collectors are not allowed to continue collection activities while the bankruptcy case is pending in court.

Is Chapter 7 or 13 better? ›

Most people prefer Chapter 7 bankruptcy because, unlike Chapter 13 bankruptcy, it doesn't require you to repay a portion of your debt to creditors. In Chapter 13 bankruptcy, you must pay your creditors all of your disposable income—the amount remaining after allowed monthly expenses—for three to five years.

How to get 800 credit score after Chapter 7? ›

How to Get an 800 Credit Score
  1. Pay Your Bills on Time, Every Time. Perhaps the best way to show lenders you're a responsible borrower is to pay your bills on time. ...
  2. Keep Your Credit Card Balances Low. ...
  3. Be Mindful of Your Credit History. ...
  4. Improve Your Credit Mix. ...
  5. Review Your Credit Reports.
Mar 12, 2022

Is it hard to get a personal loan after Chapter 7? ›

Getting a personal loan after bankruptcy may be difficult, but it's not necessarily impossible. Some lenders offer no-credit-check loans, but those often have ultra-high interest rates or fees that can lead to a debt trap.

How do I get a 720 credit score after Chapter 7? ›

Building a 720 Credit Score After Bankruptcy
  1. Out with the old, in with the new. ...
  2. Carefully consider credit card offers. ...
  3. Keep your credit lines low. ...
  4. Fix high priority errors on credit reports, and don't sweat the small stuff. ...
  5. Know that banks aren't on your side.

Will Chapter 7 freeze my bank account? ›

Do they freeze your bank account when you file Chapter 7? Generally, no. Especially if the full amount in the account is protected by an exemption. Some banks (most notably, Wells Fargo) have an internal policy of freezing bank accounts with a balance over a certain amount once they learn about a bankruptcy filing.


1. When Service Members File For Bankruptcy | Ask the Experts
(Lincoln-Goldfinch Law)
2. Legal Help : How Long After Filing Bankruptcy Can You File Again?
3. Bankruptcy 101: Advice From an Expert
(Communities First Inc)
4. Should you file for bankruptcy? | Ricardo Mendiola, Dallas Realtor & Credit Expert
(Ricardo Mendiola)
5. Do not file Bankruptcy until you know all options!
(Richard West Law Office)
6. Colorado Bankruptcy Experts Warning Signs to Consider Bankruptcy
(Heupel Law, P.C.)
Top Articles
Latest Posts
Article information

Author: Aron Pacocha

Last Updated: 12/21/2022

Views: 5529

Rating: 4.8 / 5 (68 voted)

Reviews: 83% of readers found this page helpful

Author information

Name: Aron Pacocha

Birthday: 1999-08-12

Address: 3808 Moen Corner, Gorczanyport, FL 67364-2074

Phone: +393457723392

Job: Retail Consultant

Hobby: Jewelry making, Cooking, Gaming, Reading, Juggling, Cabaret, Origami

Introduction: My name is Aron Pacocha, I am a happy, tasty, innocent, proud, talented, courageous, magnificent person who loves writing and wants to share my knowledge and understanding with you.