The "Should I File Bankruptcy" Test

Ok, so no test can tell you if you should file bankruptcy, but there are some questions you should ask yourself, and numbers that you can consider to help determine if bankruptcy is a viable solution to your debt problems.

Who Do You Owe?
The first thing you need to determine is whether or not your debts can be cancelled by bankruptcy.
While most common types of debt are eliminated in bankruptcy, some debts are harder to get rid of.  Under bankruptcy law, certain debts are non dischargeable, meaning you're still on the hook regardless of bankruptcy. Commonly these debts include:

1. Recent Tax Debts: Debt from IRS taxes due within the previous three years are generally not cancelled in a bankruptcy
2. Family Support Debts: If you've fallen behind on child support or spousal support (alimony) bankruptcy will not help you.
3. Student Loan Debts: Only under rare circumstances can student loan debt be cancelled by bankruptcy. To do so you must prove that liability for said debts would pose an undue hardship for you.

Other than that, you debts will be cancelled in a bankruptcy. Everything from credit card debts, medical debt, payday loans, personal loans, lawsuit judgements against you and even certain second mortgage and HELOC debts can be cancelled in a bankruptcy.

How Much Do You Owe?
Bankruptcy is not something to turn to just because you owe a few hundred dollars to Nordstroms. Bankruptcy is a complicated process that will affect your finances significantly. It's only used when your debts are significant and put a hardship on you and your family.

While there is no concrete number that is a "baseline" for bankruptcy, generally if you have ten thousand dollars or more in unsecured debt, then bankruptcy can help. Less than that, and you may want to consider other options.

What Other Options Do You Have?
Can you get money from family? Can you get a second job? You certainly don't want to borrow Peter to pay Paul, and you should absolutely not dig into retirement money. Is it a matter of adjusting your spending habits? Can you get on a plan to repay your debt over the next three years without sacrificing you and your families well-being?

The Real "Test"
The real test to determine if bankruptcy is right for you is to ask yourself this question:

If you don't file bankruptcy now, will you be able to be debt free in two years?

If the answer is no, and you have debts that will be cancelled in bankruptcy, then it should be considered. Why this question? Because if if you file bankruptcy now you will be debt free, and in about two years you will have great credit again and be back on your feet.

Bankruptcy is not a pleasant experience. Being insolvent generally isn't, and you'll face some hard decisions. You should know that bankruptcy is not the end of the world. It's just a way to start over fresh and get your life back together.

Want to Learn More?
Check out the following resources:
A Laymans Guide to Bankruptcy Law
Deciding on Bankruptcy