Most people feel morally compelled to pay back any money they owe. When debts build up beyond your ability to pay, it can be mentally and emotionally draining. You may want to avoid the shame of admitting you are in over your head. However, sometimes the best thing you can do is ask for help. Sometimes bankruptcy is the best option, freeing you from collections calls and giving you the new start you desperately need.

It’s been called the Midwestern work ethic -- the idea that if you just work hard enough, you can dig yourself out of any hole. But have you ever stopped to ask yourself if you need to work that hard? What if there was an easier way out of the cycle of juggling credit cards, making minimum payments, and ducking collections calls?

If you can pay your bills, you certainly should, but if you keep hammering away at debts you may never be able to repay, you may be doing more damage to your credit score and throwing away money you could be putting toward your future goals. Most people wait too long before they entertain the possibility that bankruptcy may be their best option. Instead they keep paying down interest without touching the principal owed on the loan. They move money around, borrowing from Peter to pay Paul. The whole time, their missed and late payments are driving their credit score lower and hurting their chances to get new loans or make investments in their future.

When Your Debt Could be Discharged

Bankruptcy is one of several strategies consumers can use to put their debts behind them. Whether bankruptcy is the best option depends in part on whether your debt can be discharged. The ultimate benefit of filing a Chapter 7 bankruptcy is the forgiveness of consumer debts through a process called discharge. These debts include:

• Medical bills
• Credit card debt
• Business debts
• Past-due rent and utilities
• Personal loans
• Most civil judgments
• Older tax debts

However, other debts, such as child support arrearages, recent tax debt, student loans, and secured debts like mortgages won’t go away just because you file a bankruptcy petition. You should discuss all your debts and where they came from with an experienced bankruptcy attorney to see whether bankruptcy is the best option for the money you owe.

When You Need Relief from Creditors

The older your debts are, the more likely you are to have serious financial trouble. One study showed that once an account was 120 days past due, things tended to get worse for the borrower instead of better. Balances in collections and the percentage of debtors facing lawsuits and civil judgments grew. As debt mounts, so do the creditors’ calls, emails, and letters. When your debts become seriously delinquent you run the risk of foreclosure, repossession, eviction, and other legal problems.

Bankruptcy can stop those collections efforts. Filing a bankruptcy petition -- Chapter 7 or Chapter 13 -- triggers an automatic stay on all efforts to collect a debt. Once creditors (and their collections companies) receive notice that your debt has been submitted to the bankruptcy court, they are legally required to stop contacting you to collect. Instead, they must go to the bankruptcy trustee to receive their share of your liquidated assets or payments under the bankruptcy repayment plan. If you need to press pause on collections calls, a bankruptcy may be your best option.

When You Owe More Than You’ll Ever Pay

Some debts are simply too big to pay. Maybe you had a medical crisis and are now disabled. Perhaps you are retired or on fixed income. Maybe poor spending habits have gotten so far out of hand that they go beyond what you earn in any given month. If your consumer debt (as described above) equals more than half your income, or if it would take you more than five years to pay everything off, even on a no-frills budget, bankruptcy may be your best option.

When Your Credit Score is Already Low

It is common knowledge that a bankruptcy seriously hurts your credit score. It is true that the act of filing a bankruptcy petition will cause your credit score to drop approximately 160 to 200 points. However, many consumers’ credit scores are already low long before they get to the point of filing for bankruptcy. The work you do during your bankruptcy and the act of discharging debt can sometimes raise your score enough to outweigh the harm done by the bankruptcy petition itself.

According to researchers at the Federal Reserve Bank of Philadelphia, bankruptcy filers saw their credit scores plunge during the 18 months before they filed for bankruptcy. Once the petition was filed, their credit report actually improved. Chapter 7 filers had an average credit score of 538.2 in 2010. (Anything below the low 600s is considered poor.) By the time their debts were discharged, their average score was 620.3. Successful Chapter 13 filers saw their scores increase from 535.2 to 610.8 over the three to five years of their repayment plan. If your credit score is already low due to a history of missed and late payments, bankruptcy may not only be your best option, it may even help raise your credit score and make it easier for you to get approved for a loan in the relatively near future.

At John A. Steinberger & Associates, P.C., we know when bankruptcy is the best option, and when other debt reduction techniques will work instead. We are a full-service bankruptcy law firm in Southeast MI, serving debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We carefully evaluate our clients' circumstances, and discuss which strategies will be best for them, whether or not they include bankruptcy. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.