How to Avoid Filing for Personal Bankruptcy [2024 Guide]


Bankruptcy may be a glimmer of hope for a fresh start for those who are direly in debt. But it has a lot of unpleasant consequences that must not be undermined.

Good thing is, there are several ways to avoid filing for personal bankruptcy.

If your financial situation makes you think about claiming bankruptcy, first take a look at this article to:

  • Read insights on how personal bankruptcies work
  • Find out how to steer away from the necessity of filing one

What Is Personal Bankruptcy?

In the modern legal system, bankruptcy is a status that provides debt relief to those who are financially insolvent. While this may seem quite straightforward, how bankruptcies work is actually a complicated process. Not everyone who declares bankruptcy will instantly be considered legally bankrupt as there are certain criteria that have to be met first.

Types of Personal Bankruptcies

There are different provisions for personal bankruptcies by state, but there are two types of bankruptcies that are most commonly filed for in court. These are the Personal Bankruptcy Chapter 7 and Personal Bankruptcy Chapter 13.

Chapter 7 Bankruptcy

This type of bankruptcy is also known as “Liquidation Bankruptcy”. Individuals who wish to file for Chapter 7 bankruptcy in the bankruptcy court must sell off their non-exempt properties in order to be able to pay debts.

  • Liquidation Bankruptcy is meant for persons who cannot pay for all or a significant part of their liabilities.
  • Individuals filing for Chapter 7 bankruptcy have to first pass the Chapter 7 Means Test to meet certain conditions in the Bankruptcy Code.
  • The easiest way to pass is if your income is below your state’s median. If your income is above your state’s median, you may still be able to pass the Chapter 7 Means Test if you can prove that you do not have enough disposable income.

Chapter 13 Bankruptcy

In case you are not eligible for bankruptcy under Chapter 7, next to consider is Chapter 13 bankruptcy which lets you save much of your income and assets from being sequestered. Chapter 13 Bankruptcy is also known as “Reorganization Bankruptcy”.

  • Chapter 13 bankruptcy lets you restructure payment schemes for servicing the debt.
  • This scheme is a three to five-year court-approved plan which must be strictly adhered to.
  • Individuals who have been diligent in following payment schedules may be able to have unsecured debts like hospital and credit card bills relinquished.
  • Eligibility criteria for Chapter 13 bankruptcy include having a regular income, unsecured debts no more than $395,725, and secured debts no more than $1,184,200.

Negative Effects of Bankruptcy

Although bankruptcy offers a chance for a financial reboot, the consequences of filing for bankruptcy must also be seriously considered. If you’re in serious debt and are thinking about your personal bankruptcy options, here are some of the important things you should first look into before filing.

Filing for bankruptcy is not cheap 

Yes, that’s right. Filing for personal bankruptcy costs money. It’s quite an irony that for the court to acknowledge you’re in neck-deep debt and that you could hardly pay, you’ll still have to add a filing fee to your financial burdens. The cost of filing for a Chapter 7 bankruptcy is $335, while a Chapter 13 costs $310.

You May Need to Hire Bankruptcy Lawyers

While it is possible to pursue filing for bankruptcy by yourself, proving your eligibility before a bankruptcy court is not as easy as going to a judge and saying you’re broke. Filing for bankruptcy can be a long and arduous process that will, more often than not, require expert counsel.

The cost of hiring bankruptcy lawyers can range from $1,500 to $5,000. This depends on how complex your case is and how much paperwork and effort it will take for the court to rule in favor of the personal bankruptcy chapter you’re filing for.

Loss of Property

If you’re filing for a Chapter 7 Bankruptcy, then you’ll definitely have to let go of any property that has no exemption. Selling your property also does not mean you’ll get a good price for it. You’ll often find that assets you own will be undervalued as you’ll have to accept a lower offer in compromise.

While properties considered necessary for living and working are exempt from servicing the debt, you will not be able to keep other valuable assets such as those that may have sentimental values like a family heirloom or your favorite musical instrument, unless you’re a professional musician.

Damage to Your Credit Rating

Bankruptcy is one of the many major credit score factors lenders look into. After individuals declare personal bankruptcy, they might find themselves at a huge disadvantage when it comes to getting access to loan services. If you damage your credit score, financial institutions will be hesitant to grant you loans.

The good news is that some lenders have special programs that grant bad credit loans with guaranteed approval. These lenders provide services to persons with poor credit reports but may charge higher interests. If you get into this situation, you might consider checking out some trustworthy credit repair companies that can help you reestablish a good credit rating.

Damage to Reputation

It’s not only financial institutions that may stigmatize bankrupt individuals. A bankruptcy may also damage one’s social reputation which can have a negative effect on self-esteem and even relationships. Those who might want to engage in business and are looking for prospective partners may also have a hard time gaining trust.

Should You File for Bankruptcy?

It is a good way to get debt relief, but given its negative consequences, it’s much better if you can, at all costs, stay away from that scenario.

How to Avoid Filing for Personal Bankruptcy

So before you even consider when to declare bankruptcy for yourself, here are some better options you should look into.

Settle or Negotiate Your Debt

Having to go to court is a hassle for both you and your creditor. At the end of the day, what creditors really want is to get paid. The best approach is always to settle your debt. If you have multiple creditors, prioritize the one with the biggest interest if you can. This way, the amount you save on interests can in turn be used to pay the remaining obligations.

If you’re really short on funds, ask your creditor for a loan modification. This lets you restructure your payment plans to something more feasible given your situation. This may mean longer paying periods, flexible payment schedules, or any other adjustment that would allow you to pay off your loan completely.

Sell Property

As already mentioned, it’s always best to settle your debt, especially when this debt carries interest. You might find it wise to sell some property at the moment and use the proceeds to cover obligations instead of filing for bankruptcy. If you can do this before your interest balloons, this will definitely save you from future larger payments.

Borrow Money From Family/Friends

This may seem unwise as this means borrowing money again, but shifting your loan from institutions to friends or family is actually often a better option than filing for personal bankruptcy. Given, of course, that your social circle is willing to help you out.

Family and friends are more likely to be flexible with payment terms, and there’s even a great chance that they wouldn’t require you to pledge a property or ask for interest. Borrowing free money to pay interest-bearing loans or secured credit card accounts is an efficient strategy to get rid of your debts.

Loans for Bad Credit

Another option is to ask for help from financial institutions that specialize in giving bad credit loans. These lenders give access to loans even if you have a bad credit score. You can in turn use these loan facilities to pay off any maturing debt from other lenders. This way you will buy yourself more time as your transfer gives you a new payment schedule.

Consult With a Credit Counselor

If you’re really unsure of what to do, perhaps it’s time you seek help from experts. Consulting with a credit counselor is a great way to get educated on the ins and outs of financial obligations, especially if you’re already on the brink of filing for personal bankruptcy. These debtor education providers not only offer guidance, but they can also negotiate with financial institutions on your behalf to help bring down interests and avoid late payment fees.

You can also ask your credit counselor for advice on how to fix your credit score or how to get out of debt with no money and a bad credit score.

When to Declare Bankruptcy

After considering every option mentioned here and determining that none of the alternatives are applicable to your situation, you may decide that it’s inevitable that you push through with individual bankruptcy.

In cases like these, it’s best to act immediately as prolonging bankruptcy filing may make matters worse. Delaying filing may accumulate your liabilities until you find yourself drowning in debt.

In Conclusion

If your debts have gone out of hand, filing for personal bankruptcy might be a tempting way to get a financial reset. But given the negative effects of bankruptcy, it’s always best to first consider other options with less detrimental impact. Only if you determine that there is no other option to be relieved of debt, then and only then consider filing for bankruptcy.


Is there an advantage in consolidating multiple loans into one account?

Loan consolidation can be a great strategy if you’re juggling multiple loans. One of the advantages of loan consolidation is that it makes due date tracking a lot easier since you’ll only be looking at one date. Consolidating loans is also a good way to extend maturity and even adjust different interest rates into one standard figure. Check out some of the credit card consolidation loans for examples of this type of service.

Can I still have banking privileges after I have filed for bankruptcy?

There are many financial institutions that cater to those with bad credit reports. They still offer loans, credit cards, while banks that do not use ChexSystems may not even care about past records or reasons for personal bankruptcies. You may be charged higher interests by these institutions, but being diligent with payments will definitely improve your credit score.

What assets can I save in a Chapter 7 Bankruptcy?

The laws related to filing for personal bankruptcy have been designed so that individuals can be relieved of debt without losing basic essentials for their livelihood. That’s why there are assets and properties that are exempted from liquidation when filing for personal bankruptcy Chapter 7. These things include everything that is necessary to sustain a decent but minimal living. Some of these things are: necessary clothing, household appliances and furnishings, retirement accounts, personal vehicles, jewelry up to a certain value, essential tools for trade, etc.


I’m an entrepreneur by profession and an artist by passion. I do business to pay the bills and make music to bring the thrills. Thanks to a bachelor in Business Administration, I'm well-versed in all things business. Owning a construction company certainly helps, too, but it also brings out my love for building and home protection.

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