When to File for Bankruptcy, How to Recognize the Warning Signs, and General Bankruptcy Advice

When to file for bankruptcy is a question many people have asked themselves. We all make financial mistakes in life, most of them without serious long-term consequences. If you could go back and fix one critical mistake you made before you made it, wouldn’t you want to do that?

Of course you would. Unfortunately, many of us do not recognize the signs of impending financial trouble and we take actions that threaten our financial future.

ActionYou begin to pay your regular monthly bills (mortgage, rent, utilities, etc.) with cash advances, or you are transferring funds between credit cards to keep the balances from exceeding the limit.

ResultYou are fooling yourself into thinking you can pay these high-interest debts at a later date. In fact, you are not really paying down the debt at all. This is like a Ponzi scheme where you are both the perpetrator and the victim!

ActionYou lower your payroll withholding to increase your take-home pay, and in the process incur substantial tax debt you cannot pay on April 15.

ResultYou are buying yourself some temporary relief in your monthly budget, but creating a much more serious problem. Taxes you cannot pay on April 15 incur significant interest and penalties. Filing an extension for your taxes does not prevent the interest and penalties from accruing.

ActionYou use an equity line-of-credit on your home to pay off high-interest credit card accounts. This converts unsecured debt into debt secured by the equity in your home. This can create a debt you may end up paying for decades, and even jeopardize your home if you cannot maintain the payments.

ActionYou borrow money from family or friends to “tide you over”.

ResultMy father always told me nothing comes between people like an unpaid debt. Do you want to ruin a friendship or poison a relationship over money? It’s not worth it.

ActionYou take money from an IRA or 401(k) retirement plan to pay bills. In my  professional opinion, this is the number one mistake people make.

ResultThis not only generates a large tax liability, but exhausts funds you will need for retirement, and that are already protected from your creditors.

Now, while all these outcomes are undesirable, the negative effect of these mistakes can be magnified if you ultimately have to seek bankruptcy protection from your creditors. Here’s why:

  • In some cases cash advances cannot be discharged in bankruptcy, and in extreme situations debts incurred at a time when you had the inability to repay them may even be non-dischargeable. This is known as a “credit card bust-out”.
  • Back taxes are generally not dischargeable in Chapter 7, although they can be repaid through Chapter 13, often with no additional interest or penalties.
  • When you pay off unsecured debt with your home equity, you transform an unsecured debt, which can usually be discharged in bankruptcy, to a secured debt which must be repaid to protect your home. Not a good trade.
  • When you borrow money from friends or family, you naturally feel an obligation to repay those people. If you do, and subsequently file bankruptcy, those payments can be recovered from those you love for the benefit of your creditors. How will that make them feel?
  • Many clients I see have completely exhausted their retirement accounts to service their debt, and end up filing Chapter 7 or 13 anyway. By law, however, a bankruptcy filer is allowed to exempt, or protect, funds held in a 401(k), IRA, or similar retirement account. Therefore, to my way of thinking, the worst financial mistake you can make is to mortgage your future for what may amount to just putting off the inevitable.

If you find yourself considering one or more of these actions, I urge you stop and consider whether you are experiencing a temporary financial firestorm, or whether it is building to a full-blown meltdown of your finances.

Even if you aren’t considering bankruptcy, by seeking a neutral and experienced attorney for advice, you can often develop a plan of action which will help you secure your financial future.


I have counseled thousands of people in financial trouble over my twenty years of practice, sometimes even recommending against filing a bankruptcy. So take advantage of our 30 minute free consultations to help point you on the right path.

Call (770) 427-5853 or use our contact form to schedule your 30 min free consultation.