10 Common Bankruptcy Questions

How Do I Know if I Should Declare Bankruptcy?
Rocio de las Nieves Reyes Galvez waits for the judicial commission to carry out her eviction in Madrid. She is unemployed and has not been able to find another job. Should she declare bankruptcy? © SUSANA VERA/Reuters/Corbis

Bankruptcy should only be used in the direst of financial circumstances. It is too damaging to your credit to waste on temporary financial difficulties. But how do you know if your debt problem requires a solution that serious?

Here are some signs that you might be a good candidate for bankruptcy [source: Atlas]:

  • Are you hounded by bill collectors?
  • Are you using credit cards to pay for basic necessities?
  • Are you unable to make minimum monthly payments on your credit cards?
  • Are you at risk of foreclosure, eviction or having your utilities shut off?
  • Are you emotionally distraught about your debt situation?

If you answered "yes" to several of the above questions, your first step should be to meet with a credit counselor. Avoid "credit consolidation" services advertised on TV or online. Unfortunately, some of these services are scams. Instead, use the list of approved credit counselors provided by the U.S. Department of Justice.

A credit counselor will be able to assess the seriousness of your situation and decide if bankruptcy is the only solution to free you from your debts. In many cases, though, there are viable alternatives. Learn more on the next page.