What are the warning signs of needing bankruptcy?

Since the vast majority of people who seek to file bankruptcy wait too long before obtaining legal advice, it is important to know what some of the warning signs are that should prompt one to at least have a consultation with a qualified bankruptcy attorney.

The following are some guidelines set forth by the Association of Independent Consumer Credit Counseling Agencies (AICCCA). If you find yourself fitting into more than one of these categories and you have more debt than you can afford to pay off within a short period of time (let’s say 6-12 months), then you should consider seeking advice on possibly filing a bankruptcy case:

  • Living paycheck to paycheck — This is very dangerous since any slight reduction in income, or sudden increase in expenses, such as from a job loss, unexpected medical bills, can push you over the edge. Credit card payments are missed, the interest rates skyrocket and everything can fall apart very quickly.
  • No savings cushion –This is a subset of the above. It’s important to have a cushion for unexpected expenses. In fact, you have to expect the unexpected. When was the last time you had an entire year with no unexpected expenses?
  • More than 20% non-mortgage debt to income ratio — For those spending more than 20 percent of net income to satisfy non-mortgage debt, a drastic change in spending behaviors is needed.
  • Making only minimum payments on credit cards — If you pay only the minimum amount due you are making virtually no principal reduction payments and, thus, no progress towards paying off the debt. All you’re doing is keeping your head barely above water and all it takes is a little wave to push you under.
  • Not adequately insured — Some studies suggest that 50 percent of bankruptcies involve medical debt. Without adequate insurance, the high cost of medical, home or car expenses can ruin personal finances

For other types of bankruptcy, such as those precipitated by mortgage defaults, where you need time to catch up on the payments to prevent foreclosure, it is equally or more important to see a bankruptcy attorney sooner, rather than later, to allow sufficient time to prepare to either  file a Chapter 13 bankruptcy or file a Chapter 11 case for you to save your home.