Aug 5, 2025
Mental health challenges often take more than an emotional toll — they can also lead to serious financial consequences. Let’s say you’re 35 years old and have just gone through a serious bout of depression, and during that time you burned through your emergency savings and accumulated $50,000 in credit card debt. Now, you’re stable and working hard to rebuild your life.
But the debt hasn’t gone anywhere.
Advertisement
Should you file for bankruptcy or are there other ways out? If you’re weighing bankruptcy after a crisis, here’s what to know before making the call.
How bankruptcy works
When debt becomes unmanageable, bankruptcy can offer relief. But it's not without consequences. There are two main types of consumer bankruptcy. How they impact your life (and credit) depends on which type you file. Here are the main differences:
Chapter 7: Often called liquidation bankruptcy, this can wipe out unsecured debts in exchange for giving up certain assets. It’s generally faster, often resolved in a few months, and best for people with low income and little to no property. It stays on your credit report for 10 years.
Chapter 13: This reorganizes your debt, allowing you to repay it in full or a portion over three to five years. It’s usually a better fit for people who earn a steady income or own valuable property they want to keep. It remains on your credit report for 7 years.
As noted, filing for bankruptcy will leave a mark on your credit report for a long period of time. This will impact your ability to borrow money — everything from getting a credit card to a car loan — and have major implications for your credit score. This can affect your ability to rent a home or even qualify for certain jobs. With this in mind, it's not a step that should be taken lightly.
According to Debt.org, bankruptcy should be considered if:
- Creditors are suing you for debt payment
- Your home is in danger of foreclosure
- The only means you have of paying for essentials is by credit card
- You’re using one credit card to pay off another
- You’re considering borrowing from your 401(k) to pay your bills
Bankruptcy can offer a clean slate, but it’s not something you can do repeatedly at your convenience. There are limits on how often you can file, so make sure you’re in a position to move forward and not fall back into the same cycle.
Must Read
- You can now build wealth like a landlord for as little as $100 — and no, you don't have to chase down rent or take 3 A.M tenant calls
- Goldman Sachs used to hoard prime real estate deals for the ultrarich. Two ex-analysts just opened the door for $250
- Robert Kiyosaki begs investors not to miss this ‘explosion’ — says this 1 asset will surge 400% in a year
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
What to consider instead
Bankruptcy can be a valid financial decision in some cases, but it comes with serious consequences. Before you consider filing, it's worth exploring less drastic options, including:
Advertisement
Requesting a hardship plan: Creditors might be flexible if you explain your situation. They may be willing to lower your interest rate, put you on a payment plan or even pause payments
Considering debt consolidation: These services can help organize your debts into a new loan so you only make one monthly payment.
Nonprofit credit counseling: These organizations can help you make plans, negotiate with creditors or enter a debt management program that can make debt repayment easier to swallow.
Use the snowball or avalanche methods: These strategies focus on paying off either the smallest debts (snowball) first or those with the highest interest rates (avalanche) to build momentum. The mental boost of seeing debt fall away can keep you motivated.
The reality is, only someone who understands your full financial picture can help you decide whether bankruptcy is right for you. But, if you're only able to pay the interest — or can't even pay all the interest — on your debt, then bankruptcy may be worth considering. Be sure to explore your options and reach out to experts who can help you decide the best path forward.
You May Also Like
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how
- Millionaires under 43 are reshaping investing — just 25% of their portfolios are in stocks. Here’s where their money is going
- Robert Kiyosaki issues grim warning for baby boomers. Many could be ‘wiped out’ and homeless ‘all over’ the country. How to protect yourself now
Danielle is a personal finance writer whose work has appeared in publications including Motley Fool and Business Insider. She believes financial literacy key to helping people build a life they love. She’s especially passionate about helping families and kids learn smart money habits early.
