Should I File for Bankruptcy?

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    Asking someone if you should file bankruptcy is not a simple yes or no question. Just about everyone will say: “Only as a last resort!”

    In other words, only after you have gone over all other debt relief alternatives and still can’t find a way out of this mess.

    But be careful as you weigh your options. Bankruptcy takes a toll and it’s not just financial. There is a societal stigma attached to it. For some reason, American consumers view bankruptcy as a financial scar that marks you as a failure the rest of your life.

    It is not that.

    Bankruptcy is more like a financial scab, something that looks nasty for a while, but with care and attention, eventually clears up and fades away. It’s a chance to start all over again. That’s the reason bankruptcy laws were written, to give people a second chance, not to punish them.

    But first, weigh both sides of the issue before deciding.

    Reasons to Consider Filing for Bankruptcy

    Surveys agree that job loss and medical debt are the two biggest reasons for considering bankruptcy. Many times, the two team up and light a torch to a family’s financial plans.

    Health problems can make it difficult or even impossible to do your job. The result is you either quit or are let go by the company. That is a toxic combination because you lose your source of income at precisely the same time expenses go up.

    There are some other, less imposing situations that could cause you to consider bankruptcy. You might be headed down that road if:

    • You are getting a divorce
    • Creditors are suing you for payment of debts
    • The home you own is under water and in danger of foreclosure
    • The only way you can pay for things is using a credit card
    • You use one credit card to pay off another
    • You are considering withdrawing money from a 401(k) account to pay bills

    Things to Consider before Filing for Bankruptcy

    There are far easier debt-relief solutions than bankruptcy available for people who are floundering financially, but have enough resources to right the ship.

    Calling a counselor from a nonprofit credit counseling agency is a good first step. They offer a free counseling service that looks at your finances and discusses the pros and cons of a debt management program, a debt consolidation loan or even debt settlement, any of which might help guide you back to safe ground.

    Another step in the right direction would be to get serious about creating and living within a budget. You could supplement your current income with things taking a second job or trying to sell some assets to pay bills.

    Other things to consider before making a final decision: Did I try to negotiate the debt down to manageable numbers? Is my current status permanent or is the situation expected to improve soon?

    A final consideration: Do I have a big bill or series of big bills coming due soon? You might want to hold off on paying that until you decide whether or not to file bankruptcy since those bills could be dismissed through bankruptcy.

    Here are some other questions you need to answer before making a decision on whether you want to file bankruptcy.

    Do I Qualify for Bankruptcy?

    There are two major forms of bankruptcy for individuals: Chapter 7 and Chapter 13 and each one has specific monetary qualifications.

    Chapter 7 bankruptcy is designed for people who truly can’t afford to pay their bills. To qualify, you must earn less than the median income for a family your size in your state.

    If your income exceeds the median income in your state, you could try to pass a “means test” in which a court trustee examines your income and “reasonable” expenses to determine whether you could pay these bills, or really do need the relief Chapter 7 bankruptcy provides.

    The other option is Chapter 13 bankruptcy, which is known as the “wage earner’s bankruptcy” because it requires that you have a steady source of income and unsecured debts (credit cards, medical bills, personal loans, etc.) of less than $394,725 and secured debts (home, car, property, etc.) of less than $1,184,200.

    Do My Debts Qualify for Bankruptcy?

    One of the myths about bankruptcy is that it wipes out all debts. It does not.

    Debts that can’t be wiped out are student loans, child support, alimony, income taxes, debts to government agencies, debts for personal injury caused by driving while intoxicated and any court fines or penalties.

    Debts that can be wiped out in Chapter 7 bankruptcy include credit card debt, medical bills, personal loans, lawsuit judgments and obligations from leases or contracts. Chapter 13 bankruptcy wipes out those debts, plus debts from a divorce (except support payments), debts for loans from a retirement plan.

    There are some people who are considered “judgment proof” because everything they have is exempt under state law. People that are judgment proof may not need to file bankruptcy because creditors can’t touch their assets are from social security, pension plans, 401(k) retirement savings, disability benefits, veterans benefits, alimony or support payments.

    Impact of Bankruptcy

    If you are thinking about whether to file for bankruptcy, consider the impact it will have on your life, which can be summarized in one word: Considerable!

    Here are just a few of the areas bankruptcy can touch:

    • Private life. Filing for bankruptcy means your name goes public. It’s not going to appear on a billboard downtown, but it could appear in the legal notices of your local newspaper or read over local radio or TV stations that broadcast legal notices. It also is available to anyone with a PACER (Public Access to Court Electronic Records) account. The mandatory meeting with creditors occurs in a public forum and it appears on your credit report, for whomever has access to that.
    • Credit score. Most likely, you’re credit score already has taken a beating because of nonpayment, but filing for bankruptcy drops a hammer on it anyway. It’s impossible to forecast exactly how far it will drop because too many factors are involved, but experts agree: the higher your score, the more you will fall. If you had a credit score over 700, it could drop 100-200 points. If you’re under 700, the drop could be more like 75-150 points. What is for sure is that a Chapter 7 bankruptcy will remain on your credit report for 10 years and Chapter 13 will be there for seven years.
    • Co-signers. These are people who sign their name to a loan, saying they will pay if the person receiving the loan does not. In Chapter 7 bankruptcy, the co-signer is on the hook. Creditors can go after him/her for payments, even if your bankruptcy case is discharged (successful). Chapter 13 is a different story. The protective “stay” that prevents creditors from pursing payments once you file for Chapter 13, extends to the co-signers. That stay remains in effect as long as you make regular payments on your Chapter 13 agreement.

    Bankruptcy Impact on Home

    The good news about bankruptcy and your home is that you won’t lose it … as long as you can make payments.

    Remember that the purpose of bankruptcy is to give you a chance for a fresh start and it’s a lot easier to start over if you’re not homeless. That’s why bankruptcy laws make homes exempt from creditors’ claims.

    But only if you can make the payments.

    If living in a house you can’t afford is part (or all) of the reason you’re filing bankruptcy, then yes, you could (and probably will) lose your home.

    In Chapter 7, if you fall behind making payments, you could seek protection for your home by filing Chapter 13 to allow you time to catch up. Or, you may have to throw in the towel and let the bank foreclose on you.

    In Chapter 13, it’s far more complicated, but you essentially return to the default status you were in before declaring bankruptcy. That means creditors who have claims against you can go after you for payment.

    Will Bankruptcy Benefit You?

    With so many factors involved in the decision-making process, a “Yes” or “No” answer isn’t possible, but here is a good guideline to use in making a final decision.

    If you can’t find a way to get out of debt in the next five years – and have diligently researched solutions – then yes, bankruptcy can benefit you.

    But weigh the pros and cons and remember one other thing: You can’t go to jail just because you owe someone money.

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    Author

    Staff Writer

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

    Sources

    1. NA, ND. Chapter 7 – Bankruptcy Basics. Retrieved from http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
    2. NA, ND. Chapter 13 – Bankruptcy Basics. Retrieved from http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
    3. McElwee (2017, June 28) Are you Judgment Proof? Retrieved from http://www.natlbankruptcy.com/judgment-proof/
    4. O’Neill, C. (ND). Debts That Cannot Be Discharged in Bankruptcy. Retrieved from https://www.thebankruptcysite.org/nondischargeable-debts
    5. NA, ND. Does bankruptcy information go on the public record? Retrieved from https://www.investopedia.com/ask/answers/102814/does-bankruptcy-information-go-public-record.asp
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