With consumer debt at an all-time high, a financial planner explains who should consider bankruptcy

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• Bankruptcies were up 19% year-over-year in January as consumer debt reaches an all-time high.
• The most common forms of bankruptcy for individuals are Chapters 7 and 13, and both have pros and cons.
• If your problem is poor financial habits, bankruptcy won't automatically fix those for you.

Are you feeling overwhelmed by your debt? You're not alone. Consumer debt — especially credit card debt — is at an all-time high as rising interest rates and high inflation continue to place financial pressure on Americans' budgets.

Delinquencies (and with it, bankruptcies) are also rising, as it's become more expensive to carry debt and consumers are facing more than they can handle. Total bankruptcy filings in January shot up 19% from a year ago, according to data from legal research firm Epiq.

Filing for bankruptcy can often be seen as a get-out-of-jail-free card from debt, but that's not exactly the case. In fact, bankruptcy can often wreak havoc on your finances and cause long-lasting damage to your credit. It should be seen as a last-case scenario — but how do you know when you're at the end of your rope?

As a financial planner, I believe it's important to understand the bankruptcy process before making any serious decisions. Here's how to know if bankruptcy is right for you.

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Why are bankruptcies rising?

There are a number of micro- and macroeconomic reasons why bankruptcies are rising. For one, interest rates have been steadily rising in an effort to combat high inflation. This makes it more expensive to carry debt, whether it's credit cards or a mortgage. High inflation also makes everything more expensive, which can put additional pressure on your budget and force you to take on more debt to cover your expenses, creating a flywheel effect for your debt.

Filing bankruptcy becomes a potential last step in order to handle overwhelming debt. Although it may not seem like an ideal situation, understanding why bankruptcy has become so common can help you identify if it's right for you.

The most common types of bankruptcy for individuals

There are several different types of bankruptcy, but most individuals will file for either Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 bankruptcy involves selling your assets to get rid of your unsecured debt, like credit card bills. It typically costs less to file this type of bankruptcy, but it's only available to those who meet a certain income threshold and can't pay their existing debt obligations.

A Chapter 13 bankruptcy allows you to keep certain assets while paying back creditors over a three-to-five-year period. It's available to individuals with a steady income who can make monthly payments according to the terms of their plan. Chapter 13 often costs more, but allows you to keep more assets than you would in Chapter 7, as long as you stick to the repayment plan.

Once you decide on bankruptcy, you'll go through mandatory credit counseling, pay the necessary court fees, and then proceed with your case.

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Should you file for bankruptcy?

Bankruptcy can be a difficult choice to make, and it's important to consider all the factors before making a final decision.

Bankruptcy does provide a fresh start in some ways: It allows you to discharge certain debts, offers some financial freedom, and may empower you to build smarter financial behaviors. However, there are many long-term costs to consider. For one, you'll need to factor in the cost to file, which includes court fees and attorney fees.

Bankruptcy will also cause a steep drop in your credit score and will remain on your credit report for 10 years, making it hard to access affordable loans and other types of financing in the future. It also doesn't guarantee you won't wind up in debt again if you have poor financial habits.

Depending on your personal financial situation, the benefit of getting rid of your current debt may outweigh any long-term downsides.

If you're not sure if bankruptcy is right for you, you may want to consider reaching out to a bankruptcy attorney to learn all of your options. Careful thought should go into understanding all your options and weighing the costs associated with each one before taking action, as deciding to go down the bankruptcy route can have lasting effects on your financial situation.