The good news: The number of households filing for bankruptcy declined last year, according to the federal court system, and Fitch Ratings, a credit rating and financial research company, predicts it will probably decline again this year.

“Reduced interest payments and full employment will take away the incentive for consumers to seek bankruptcy protection,” said Fitch's managing director Michael Dean in a public statement.

The bad news: Six years after the end of the Great Recession, many families are still struggling with debt issues. If you're one of them, and the bills and phone calls just keep coming, could bankruptcy help get back on your feet in the long run?

When someone files for bankruptcy, he is asking a federal judge to cancel some or all of the debts he is unable to pay. If the judge approves, then most or all it will either disappear or be reorganized for easier repayment.

There are downsides, of course, and we’ll get to those. But first, here are three times filing for bankruptcy could actually help your financial future.

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1. You’re in debt way, way over your head

Do you owe more money than you'll ever be able to pay back? According to Equal Justice Wyoming, the state court system's civil legal-aid program, signs you may want to consider bankruptcy include:

  • You can't afford to pay more than the minimum due on a bill
  • You're dipping into your retirement funds
  • You've maxed out most or all of your credit cards
  • You can't even afford to make credit card consolidation payments

Although you may have to surrender some your possessions to pay off your debts, bankruptcy isn't designed to strip you of everything that you own. Instead, it's supposed to give you a “fresh start” with your finances, according to the City Bar Justice Center. You should be able to keep some of your possessions, depending upon your specific case and the state where you live.

2. Your debt is taking an emotional toll

Your peace of mind is just as important as your balance sheet. Signs that you may have an emotional need to consider bankruptcy, according to Equal Justice Wyoming, include:

  • You're afraid of the phone ringing and getting the daily mail makes you nervous
  • Your financial problems are putting stress on your family relationships
  • You peer out the window wondering when a process server or repo person will show up

Once you file, most creditors must stop trying to collect debts from you while the case proceeds, according to the federal courts. They cannot sue you, garnish your wages or even call you on the phone to demand payment.

You also won't go to jail because you can't pay your debts, according to the City Bar Justice Center. Creditors might take your property or income, but never your freedom. However, if you have committed a separate crime related to your debt, you can still be arrested and prosecuted for that crime.

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3. You’ve lost control over your finances

According to Wyoming Legal Aid, bankruptcy may be an option when:

  • Creditors are garnishing your paycheck or bank accounts
  • Even the debt consolidation companies won't work with you

One indirect advantage of filing for bankruptcy is that it forces you to consult with trained professionals about how to better manage your finances. The court will require that you undergo two sessions provided by government-approved vendors, according to the Federal Trade Commission:

  • No earlier than 180 days before filing for bankruptcy, attend a credit counseling session with an expert who will discuss alternatives to bankruptcy and help you to develop a personal budget plan.
  • After filing but before the court approves your petition, complete a debtor education course, which normally takes about two hours and teaches you how to better manage your money, credit and budgets.

You can complete both either in person, over the phone or online. You will pay approximately $50 for the credit counseling and perhaps twice as much for the debt education. If you can't afford it, ask the vendors for fee waivers.

The cost of bankruptcy 

Bankruptcy can give you a fresh start, but only if you start with a fresh attitude toward money management. If you incur new debts after going bankrupt, it won't protect you from them. Plus, you can't file for bankruptcy again until a mandatory waiting period expires, which can last up to eight years.

Like any drastic measure, bankruptcy will cost you, on more than one level:

  • There are court filing fees, plus you may want to hire an attorney
  • The bankruptcy goes onto your credit record for up to 10 years
  • Not all debts can be discharged via bankruptcy. You will still owe child support, alimony, fines, taxes and some student loans.

There is no “typical” bankruptcy case, according to Wyoming Legal Aid, which advises that you consult with a bankruptcy professional.

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David Arv Bragi is a freelance journalist and marketing consultant. He has been writing about health and safety issues since the 1990s and currently lives in Portland, Oregon.