“Should I file for bankruptcy?” If you have ever asked that question, rest assured that you are one of millions of other Americans who have also asked that same question (especially in the last few years). Unfortunately, for a few of you, bankruptcy probably is your only and inevitable option. However, my intent in this post is not only to educate you and answer questions about bankruptcy, but try to convince the vast majority of you who are considering bankruptcy … that bankruptcy is NOT your only option, and to avoid it at all costs.

First, What is Bankruptcy?

‘Bankruptcy’ is the legally declared inability to pay back your debts. It is a legal process of consumers (or businesses) who seek federal and legal protection from creditors when a borrower is unable to repay debts.

Who Should… And Should NOT… File for Bankruptcy?

First, bankruptcy should be your absolute last resort. Let me rephrase: bankruptcy MUST be avoided at all costs. Only after you have explored and attempted the MANY other options available to you, then yes, there may be a few people and circumstances where filing for bankruptcy makes sense. These are a few situations when filing may be your only logical choice:

1. You’ve Already Tried to Negotiate with Creditors:

If you (or someone on your behalf) have already called your creditors to work out a repayment or loan modification plan, and those creditors demand full payment, want full payment now, and you don’t have the means to pay for it, then typically you have no other option but to file for bankruptcy. (However, typically, most people have not called to negotiate with creditors. Most creditors are absolutely willing to work with you and would much rather re-negotiate a lower interest rate or payment plan than having you declare bankruptcy. So get on the phone NOW and start negotiating a repayment plan).

2. You’ve Been Sued or Medical Bills are Stacking Up:

If you have received a lawsuit summons, consult an attorney, and do NOT ignore the summons. Also, one of the major reasons people have to file for bankruptcy is because medical bills stack up, and despite whether or not they have insurance, they don’t have the funds to pay for those bills. Bankruptcy can provide relief by either discharging bills completely, or coming up with a repayment plan.

3. Expenses Exceed Your Income:

Now, let’s be honest… most American’s expenses exceed their income (so don’t let that be your excuse); but, there is a difference when your liabilities exceed your assets, and your income is not even sufficient to pay for the minimum payments of those liabilities. If you absolutely have no other way to make more money (which, have you tried to get a 2nd or 3rd job?), and you are months behind on payments and can’t even afford the minimums, have no assets, can’t do a repayment plan, can’t qualify for debt consolidation, and your credit is ruined, then yes, unfortunately bankruptcy may be your only option. In other words, if you have tried every other option, and this is your last resort. But, have you actually tried ALL your other options (if not, read the article on this blog entitled: 101 Tips for Getting Out of Debt).

• Ask yourself: Do I have any funds or liquid assets in retirement funds, stocks, bonds, real estate, vehicles, or college savings accounts, etc. If so, liquidating these assets are your best option. Have you considered debt consolidation, debt settlement, or credit counseling? Then, after reading the article (and implementing) the ’101 Tips for Getting Out of Debt,’ if at that point you still are in no position to pay off your debts, then perhaps bankruptcy is an option (but… hint, hint… if you actually read and implement the ‘Tips for Getting Out of Debt,’ then most likely you will NOT need to file for bankruptcy).

If, and only if, bankruptcy is your only option, do realize there are consequences (read below), but also recognize that bankruptcy could give you the financial footing you need and give you a fresh start in life. It’s scary, but sometimes necessary.

Filing for Bankruptcy Has Its Consequences

Again, filing for bankruptcy is sometimes the right (and only) choice; but, before filing, be aware of the serious consequences of doing so. Here are a few:

1. Say Goodbye to Your Credit:

Simply put, bankruptcy destroys your credit, and will remain on your credit report for 7-10 years. What does that mean? It means that realistically you won’t be able to borrow money or qualify for a loan, credit card, or line of credit, in the next 10 years. And, even if you do qualify, the interest rate you’ll be charged on that borrowed money will be extremely high. Future creditors will then view you as ‘high risk’ (and the higher the risk, the more the lender will charge).

2. Employment Will Be Affected:

It means that every time a background check is done on you (for employment or any other purpose), or anytime you fill out a job application, the ‘bankruptcy’ will show up, and thus affect both your current employment and future employment opportunities. The future (or current) employer could potentially now view you as personally and financially irresponsible and possibly untrustworthy. And, if you lie to an employer (that you have never filed), it can be charged as a crime.

3. Every Financial Aspect of Your Life Will be Affected:

Have you thought about what will happen when you go to apply for a bank account, insurance policy, cell phone plan, place to rent, start a business, etc.? Well, you get the point!

4. Say Goodbye to Opportunities That Come With Plastic:

Using ‘plastic’ in our society is, in many cases, absolutely necessary… so think about what will happen the next time you go to a hotel, buy an airline ticket, shop online, rent a car, pay tuition, need credit for that emergency situation, etc… and you don’t even have a credit card for such situations.

5. Hello… There Are Costs:

If you don’t have money to pay your creditors, where are you going to get the money required to file for bankruptcy or pay for the attorney fees? Because of the intricacies involved with Bankruptcy, it is highly advisable to consult an attorney; simply put, doing so will be a pretty penny. Most people who file for bankruptcy don’t realize that there are many circumstances where the court system may actually still require you to pay a portion of – or in full – the debts owed. Also, any funds or assets you own could also be required to pay for the debts owed. Are there financial costs associated with bankruptcy… ABSOLUTELY!

6. Realize there are Personal, Social, & Mental Impacts:

Often, people who experience bankruptcy lose self-confidence, have feelings that somehow they’ve failed, begin to lost sight of their goals and dreams, etc. Relationships and marriages are often affected (and unfortunately ended in many instances). Families can be torn apart. Also, while it is unfortunately true, because social status is lost, friends are lost (and the ability to pay for entertainment with friends is lost). Just the process of bankruptcy (dealing with creditors and the legal process) is a gut-wrenching and life-changing event that causes life-long damage. (Keep in mind also that a ‘bankruptcy’ is filed in the courts and thus a public record for all to see). Before filing, please consider the very personal impacts that bankruptcy causes.

Avoid Bankruptcy AT ALL COSTS:

Bankruptcy should be avoided at all costs. There are few people who have gone through bankruptcy who will say that it is a painless process that just ‘wipes clean’ your debt and you ‘start fresh.’ Do NOT be fooled! There are serious psychological and financial consequences that you will have to deal with for years.

I would advise anyone to seriously consider and implement ALL the other options available to you before even considering bankruptcy as an option. Even honest attorneys (good luck finding one ) will tell you that bankruptcy should be your last option. The ‘giving up’ mentality will follow you for the rest of your life; the guilt and the shame will be difficult to overcome; the risks of friendships and relationships (even marriages and family) being lost is serious; future employment opportunities will be jeopardized; your credit will be ruined; and your financial future will be hugely impacted.

Consider, learn about, and take action on ALL the other options available before deciding to pursue bankruptcy.