When should you consider filing for bankruptcy?

Between today's inflationary issues, the lingering high-rate landscape and the other economic hurdles that are looming, managing everyday expenses — let alone debts — has become a major challenge for millions of Americans. As a result, personal bankruptcy inquiries are ticking up nationwide, surging to their highest level since 2020 during the first quarter of 2025. This spike is part of a larger trend of economic strife that's being fueled by mounting financial pressure across households of all income levels.

Notably, the increase in bankruptcy inquiries coincided with a third straight quarter of elevated consumer stress, signaling that the financial strain Americans have faced recently isn't letting up. And, late payments on credit cards have also been climbing, further showcasing how borrowers are buckling under the weight of their high-rate debt. The percentage of credit card users who are making minimum-only payments has also been rising.

This uptick in consumer stress, coupled with the surge in bankruptcy interest, brings up an important question: When should you actually file for bankruptcy? While the decision to file for bankruptcy should never be taken lightly, in certain situations, it might be the best (and most responsible) step toward financial recovery.

Learn what bankruptcy alternatives are available to you now.

When should you consider filing for bankruptcy?

Filing for bankruptcy is a serious decision, but it can provide crucial relief if your financial situation has become unmanageable. You might want to consider bankruptcy if:

• You're unable to make minimum payments. If you consistently can't cover even the minimum payments on your credit cards, loans or other obligations, it's a sign that your debt burden is too heavy. Continuing to juggle payments can trap you in a vicious cycle of fees, penalties and compounding interest.
• Your debt totals exceed your income and assets. When your unsecured debts — like credit card balances, medical bills or personal loans — are significantly higher than your income and assets, bankruptcy can help you either erase or restructure what you owe.
• You're facing foreclosure, repossession or wage garnishment. Bankruptcy can trigger an automatic stay that halts most collections activities, including foreclosure proceedings, repossessions and wage garnishments. This can buy you time to regroup and explore ways to save your home or protect your income.
• You've already tried other debt relief strategies without success. If credit counseling, debt forgiveness and debt management plans haven't helped you regain control — or if your debts are simply too large for those programs to address — bankruptcy may offer a more comprehensive, legally binding solution.

It's important to remember that there are different types of bankruptcy. Chapter 7 bankruptcy, which is the most common type for individuals, can wipe out many unsecured debts quickly but may involve the liquidation of non-exempt assets. Chapter 13, on the other hand, sets up a three- to five-year repayment plan and can be useful for those who want to protect certain assets like a home or car. Choosing the right type depends on your goals and financial situation.

Explore your debt relief options and get started today.

When should you consider other options?

Despite the potential relief bankruptcy offers, there are situations in which it makes more sense to explore alternatives. Here's when you may want to do that:

• Your debt is primarily student loans, recent taxes or child support. These types of obligations typically cannot be discharged through bankruptcy (at least not in full), making the process less beneficial if they constitute the majority of your debt burden.
• You've recently made large purchases or cash advances. Bankruptcy courts may view such transactions as "presumptive fraud" if made within 90 days of filing, potentially making those debts non-dischargeable.
• You've transferred assets to friends or family. Shifting property or money to protect it from creditors can be considered bankruptcy fraud and may result in your case being dismissed.
• You have significant non-exempt assets. If you own valuable property that's not protected by exemption laws in your state, Chapter 7 bankruptcy could result in forced liquidation. In these cases, consulting with a bankruptcy attorney about your state's specific exemptions is an important first step.
• Your credit score is currently good. Bankruptcy typically lowers credit scores by 100 to 200 points (or more) on average and remains on credit reports for seven to 10 years. If you have strong credit, a debt management plan or consolidation loan might be less damaging alternatives.
• Your income has temporarily decreased but will likely recover soon. If your financial hardship stems from a short-term situation like temporary unemployment or medical leave, less drastic measures may be more appropriate.
• You have access to non-retirement assets. If you can sell investments, property or other assets to address your debt without compromising your retirement accounts, this approach generally causes less long-term financial damage.

The bottom line

The spike in bankruptcy inquiries this year is a clear sign that many Americans are grappling with unsustainable financial pressures. And, while bankruptcy isn't the right choice for everyone, it can provide a fresh start for those whose debts have become unmanageable. So, if you're drowning in bills, facing legal actions from creditors or feeling crushed under the stress of unpayable debts, it might be time to seriously consider filing.

That said, bankruptcy is just one tool available to you. Before you move forward, explore your other debt relief options, weigh the pros and cons and consider getting professional advice tailored to your situation. With the right plan in place, a more stable financial future is possible, whether or not it ultimately involves bankruptcy.