7 Signs You're Heading Into Bankruptcy

If you’ve been grappling with a lot of personal debt, ignoring the problem won’t make it go way.

At best, your bills will simply continue to pile up, and you’ll wind up paying a small fortune in interest and principal payments. At worst, you could wind up in bankruptcy court.

Bankruptcy will obviously damage your credit rating. But it could also impact you in other ways, too, such as hurting your ability to get a job.

As the President of ACCPros, a credit counseling trade association whose members help hundreds of thousands of struggling consumers every year, I’ve seen plenty of red flags that consumers miss when they’re overwhelmed by debt.

Here are seven warning signs that you may be headed into bankruptcy.

1. You’re Already Missing Payments

There’s perhaps no bigger warning sign of excessive debt problems than an inability to keep up with your current bills – especially loan obligations, like a mortgage, student loans, an auto loan, medical bills or credit card payments. Some people dealing with financial hardship will start making minimum payments on their credit cards as a way to reduce their monthly cash outflow. But if you find you can’t even afford do that, and still cover all your bills, you’re likely way over your head financially.

2. You Don’t Even Qualify for a Debt Management Plan

Some consumers in debt attempt to enroll in a debt management plan. This solution can often help those who want to reduce their payments to creditors, lower their credit-card interest rates, or have a single monthly bill to pay, as opposed to many bills. But if a credit counselor at a debt management firm examines your budget and finds that you don’t even have enough money to enter a debt management plan, you might be forced to file for bankruptcy protection.

3. You’ve Taken Out a Home Equity Loan – But It Didn’t Help

A home equity loan can seem like a good idea when you have big credit card bills that you want to pay off once and for all. The trick is to pay off the credit cards and not run them up again. Otherwise you have a mortgage, a home equity loan AND credit card debt to repay. Tapping a home equity line of credit is never advisable for paying off credit card debt. Why? Well, you’ve taken on secured debt (the house is the collateral against the loan) to pay off unsecured (credit card) debt. Now the credit cards are paid off but there is still the mortgage and the home equity loan. If those can’t be paid, the homeowner risks losing his/her home and possibly seeking bankruptcy protection, all to pay off credit card debt (which may be discharged in bankruptcy). Never a good position to be in.

4. You’re Getting Demanding Phone Calls From Debt Collectors

Another huge red flag that you have too much debt is when you start receiving threatening letters in the mail or demanding phone calls from debt collectors. This usually occurs when your debts are 30 to 90 days past due. You might also get notices that a past-due account has been reported on your credit report, put into collections or charged off as uncollectable by your creditors.

5. Your Credit Cards Are Maxed Out

One of the bankruptcy tipping points for many people is when their credit cards are finally maxed out. After you’ve charged your cards to the limits, you may find that no one will increase your credit lines and that you can’t get approved for new lines of credit. If this happens, and you’ve been using your credit cards to cover basic expenses, like food and gas, you may have to resort to bankruptcy just to stay afloat.

6. You Can’t Recover From a Major Personal Setback

Big medical bills, job loss and divorce are some of the most common reasons that Americans wind up filing for bankruptcy protection. So if you’ve had healthcare problems that left you with large hospital bills, you’ve gotten laid off and haven’t been able to find another job, or you’ve gone through a costly marital breakup, all of these personal challenges could lead you down the road to bankruptcy if you’re not careful.

7. You’ve Turned to High-Cost Loans

When cash-strapped consumers get desperate enough, many will turn to high-cost loans, like payday loans or car title loans. Unfortunately, many of these loans have exorbitant interest rates, and they can often put you in a cycle of debt where you’re rolling over one loan to the next. Under these circumstances, bankruptcy can seem like the only escape.

Hopefully, by recognizing some of these warning signs, you’ll be able to better spot – and fix – financial problems before they get out of control and force you into bankruptcy.

Editor’s note: Late payments, collection items, maxed-out credit cards and, of course, bankruptcy are all things that will hurt your credit. You can see how these problems can affect your credit by using the free tools on Credit.com to monitor your credit scores, and get a breakdown of your credit profile.