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Waiting too long to file bankruptcy may create long-term damage

Many people in Washington state and elsewhere throughout the country are inclined to want to put off a bankruptcy filing as long as possible. The perceived stigma of bankruptcy still perpetuates a feeling that filing for relief marks an end to a valiant fight to survive financially. However, a 2018 law review study has found that consumers can suffer considerable personal and financial damage by waiting too long.

The report concludes that the longer that people wait to file bankruptcy, the more intense their struggle, which has a negative impact on their fresh start opportunities. The struggle to avoid filing is so compelling in some persons that they end up sacrificing on food and other necessities to try and keep paying their bills. They may struggle for a number of years against all odds.

This intensive bout with overwhelming debt is referred to in the recent study by the Notre Dame Law Review as the "sweatbox." Instead of stopping the bleeding, courageous consumers continue to suffer bill collectors, asset depletion, collection lawsuits and deprivation of the necessities, just in order to avoid filing bankruptcy. The study was based on a survey of thousands of people who filed for bankruptcy from 2013 through 2016.

The study found that more long-term damage occurs to the individual's financial situation by waiting for two or more years to file for bankruptcy. The study found that early filers had more assets and a more solid financial footing post-bankruptcy than those who waited for years. Experts recommend that people make a decision to file when, for example, their debts are more than 40 percent of their income.

Other indicators include the situation where the individual uses new credit cards just to keep up with accumulated debt on existing cards. This creates a spiral of debt that is increasingly impossible for most people to resolve. A large build-up of credit card debt, medical bills and unsecured personal loans also indicates that it may be time to file for Chapter 7 bankruptcy relief. In Washington State and elsewhere, Chapter 7 provides for immediate, permanent elimination of all unsecured debt, without crippling repayment plans.

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