Bankruptcy – Should I File? Can it be Avoided?

Everyone I meet who is considering bankruptcy is never happy to be in my office.  They all view bankruptcy as the last alternative and usually have tried everything they can to avoid bankruptcy.  Sometimes they have worked with a debt consolidation company and have not had success.  There may be debt consolidation firms that are beneficial, but none that have ever worked with my clients.  With respect to debt consolidation firms my advice is very simple – be extremely careful about the promises that are made to you.  If the promises seem too good to be true – they probably are!

The bankruptcy law was reformed a few years ago to prevent what was believed to be abuses of the bankruptcy process.  The people that I meet with are not people who are not trying to abuse the system.  In almost every instance they have suffered from one or more of the following:

  1. Unemployment or underemployment for an extended period of time;
  2. Serious illness in the family; or
  3. Divorce.

Many times the people in my office have who are considering bankruptcy have suffered from two of the above situations.  The purpose of the bankruptcy law is to provide people with a fresh start and for everyone I have assisted with a bankruptcy filing they simply would never have gotten out of debt without the aid of bankruptcy.    If you owe interest on credit cards that exceed $3,000 per month and make less than $40,000 per year, you will never get out of debt.

 If you are thinking about filing bankruptcy, some items you may want to consider are:

  1. Do you anticipate incurring significant additional debt in the next 6 – 12 months? E.g. health expenses or continued unemployment.  If you anticipate incurring a significant amount of debt because of an illness then you may want to consider delaying any bankruptcy filing.
  2. What do you own that you cannot protect from your creditors?  Under the bankruptcy law you are allowed to protect or “exempt” certain items which means you can keep them after the bankruptcy filing.  If you own property that has value and it is not exempt then the bankruptcy trustee will seize the property and sell it to pay your creditors.  You need to be careful in determining what you own.  Have your parents transferred their house to you to protect it if they go into the nursing home?  Although you may not consider this real estate “your” house, it is certain that the bankruptcy trustee would not take such a position.
  3. Are you behind on your mortgage or home equity line of credit?  If you are behind on the mortgage or home equity line of credit they you would need to file a chapter 13 bankruptcy (and pay back some debt over a period of up to 5 years)  if you want to keep your home.  You can only file a chapter 7 bankruptcy (liquidation of any non-exempt assets and discharge of debt) if you are current on your mortgages.  If you are not current then under a chapter 7 bankruptcy your mortgage company can foreclose on your house if you are not current on your mortgage. 
  4. How will the bankruptcy affect my credit?  Every single person I meet with has asked this question.  The bottom line is that if you are considering filing for bankruptcy your credit score is probably not very good already.  After you file for bankruptcy, the bankruptcy filing can stay on your credit report for up to 10 years.  However, in many instances you are probably a better credit risk a year or two after filing bankruptcy then before you filed.  First, you have probably gotten rid of a significant amount of debt which leaves you more money to pay new creditors.  Second, because you have just filed bankruptcy, creditors know that you can only file a chapter 7 bankruptcy and get a discharge every 8 years. 

There are some situations when the filing of bankruptcy is the only viable option to allow someone to recover from significant debt.  When considering if bankruptcy is the right option for you, it is important review all of your options to determine what is best for you.

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