This can take place during big surprises and important events in life such as meeting with a potential employer or even in an attempt of scoring a first date with a gorgeous male/female.
This can cause extreme awkwardness and possibly even fatal depending on the circumstances but by stating this phrase you can state the fact that the person who opened his mouth shouldn't have said anything, even though the damage has already been delt.
U.M.'s Friend (on phone in background): "Yo man, we'll bring you that dime sack of weed as soon as he gets done talkin' to this googly lookin' lady about some stupid job to support his family."
Unemployed Man: "You're sinking the ship bro."
Potential Female: "Aww thanks David for this beautiful ring! I bet it costed a fortune!"
Charlie (standing next to David): "Thank God for clearance bins at Wal-Mart."
David: "Charlie, You're sinking the ship, man."
Charlie: "Dohhh! Crap!"