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What point in a financial crisis should a person consider filing bankruptcy?

Knowing whether to file bankruptcy is a major step toward solvency

When credit cards are used to pay for necessities, bill collectors have begun calling regularly and debt consolidation appears to be the only way out of a financial mess, it may be time to consider filing bankruptcy.

Legal experts agree that these situations are clear-cut signs that filing a petition for relief with the U.S. Bankruptcy Court may be the best alternative for many people in debt. As Ohio bankruptcy attorney Susan Marie Gray told Forbes magazine, "If you can't pay your bills and your debt is mounting, you're already bankrupt."

To get a firm handle on what is owed, a financial inventory is necessary. That means tallying all liquid assets, including retirement funds, college savings accounts, real estate and vehicles. Weighing them against a list of bills and credit statements should give an individual an idea of how much the debts outweigh the assets.

South Carolina attorney Dana Wilkinson said he generally advises clients that if they can't pay off their debts in five to seven years, they should file bankruptcy.

Wilkinson's reasoning is that in addition to life changes that can occur in that time - a major illness, a job change or a child starting college - a Chapter 13 filing can eliminate their debts in five years or less without losing their property. In addition, the detrimental effect of bankruptcy on a person's credit fades significantly after five years, although it remains on their credit history for as much as a decade.

Most importantly, Wilkinson said the lack of any savings indicates it's time to consider bankruptcy.

"In short, if you can’t get your debt paid in five to seven years, it is unlikely you can do it at all, and it serves no useful purpose to prolong the inevitable," Wilkinson writes on BankruptcyLawNetwork.com. "If you don’t have savings for ordinary emergencies, much less big emergencies like a serious illness or a layoff, you are in a downward spiral."

For those who decide that filing bankruptcy is not right for them, there are other options. These include negotiating settlements or better payment plans with creditors and seeking help from a credit counseling agency. While these are viable alternatives, they don't offer the same protection provided in a bankruptcy action. Creditors are prevented from pursuing bill collections or filing lawsuits against the debtor because an automatic stay is placed on all accounts in court until the case is concluded.

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