The answer to this question may surprise you. You actually do not have to be destitute to file bankruptcy. Ideally, my clients would come to me before the bottom drops out from under them, but many wait until they are almost a year behind on their mortgage payments or a car has already been repossessed before seeking counsel from a bankruptcy attorney. In fact, you can even file a Chapter 7 case and have whatever non-exempt property (property that is not capable of being protected from the Chapter 7 trustee and our creditors) you own liquidated by the Chapter 7 trustee administering your case to pay your unsecured creditors. I have seen creditors get paid out at 100% in Chapter 7 cases, though this is rare. Most are “no-asset” cases in which creditors receive nothing.
In Chapter 13 cases, you will have the option to pay back some of your debts over a 3-5 year period. In some cases, unsecured creditors will receive nothing, while in others, all of your creditors will receive 100% of what you owe them, only with no fees and interest accruing during the plan period.
Chapter 11 is another animal entirely, as businesses need sufficient cash reserves to be able to whether a reorganization effort through bankruptcy. Individuals filing for Chapter 11 should take this same advice to heart, as Chapter 11 fees are much higher and cannot be paid out over the life of a plan like in a Chapter 13.
The bottom line is this: Seek the counsel of a bankruptcy attorney well before you receive a foreclosure notice on your home. The earlier your problems can be addressed, the more likely bankruptcy can be avoided. If bankruptcy is still required, the less issues you have, the smoother your case will go through the system.