Is Bankruptcy a Good Idea for You?

Deciding whether to file for bankruptcy is difficult. Most people try hard to pay their debts. Unfortunately, there may come a time when you're in over your head, and bankruptcy is the only solution.

You should consider many factors before making this decision. Bankruptcy isn't for everyone. You may find that you are judgment proof or believe you can fix your financial woes with a few simple changes. You may talk to a credit counseling agency or debt consolidation company to work out a reasonable payment plan with your creditors. If these are not viable options, you may decide that bankruptcy is the only way to get true debt relief and a fresh start.

Here, we'll explain the different types of bankruptcy available to you. We'll also discuss bankruptcy basics and whether you can file. Finally, we'll describe the ways a bankruptcy will impact your life.

Two Types of Personal Bankruptcy

The U.S. bankruptcy courts offer two types of bankruptcy to individual filers. You and your bankruptcy attorney can decide which one is right for you:

Chapter 7 bankruptcy: This type of bankruptcy will wipe out most of your consumer debts and liabilities in as little as three to six months. After you file, and there is no objection to your filing (by e.g., the bankruptcy trustee) the bankruptcy judge or court will grant a bankruptcy discharge of much of your secured and unsecured debt. In a Chapter 7 bankruptcy case, you may lose some of your personal property or risk liquidation of some of your assets.

Chapter 13 bankruptcy - This type of filing involves a repayment plan through which you pay back a portion of your debts over time. Your monthly payments will depend on your income. You'll pay off as many debts as possible over three to five years. Once you complete your repayment plan, the court will discharge your other dischargeable obligations.

The bankruptcy process takes time and dedication. Both Chapter 7 and Chapter 13 will affect your credit report, credit score, interest rates, and lifestyle. The type of petition you file will heavily depend on your specific financial situation.

Consider the points below before filing for bankruptcy and choosing which Chapter is right for you.

Am I Eligible for Bankruptcy?

Only some people are eligible for bankruptcy. You may make too much money. Some petitioners don't owe enough money to file a Chapter 7 or Chapter 13 bankruptcy case.

According to the Bankruptcy Code, you must meet specific requirements to file for each type of bankruptcy. Some of these requirements are as follows:

  • You pass the means test
  • Your debt-to-income ratio must meet the current threshold
  • You can't own property or assets that you could use to pay off your debts

Section 707(b)(2) of the Bankruptcy Code dictates that anyone filing for Chapter 7 bankruptcy pass a means test. When applying the means test, the courts consider the following:

  • Your income
  • Your expenses
  • The size of your family
  • The median income of residents in your state

If you pass the means test, your bankruptcy petition will move forward. The court will amend your petition to Chapter 13 bankruptcy if you don't pass the test. It's important to remember that there's no guarantee that the court will approve your Chapter 13 petition. If the court believes you can pay your debts, it will not approve your case.

You may want to meet with a local bankruptcy lawyer to discuss your options.

Which Debts Are Not Discharged in Bankruptcy?

Filing bankruptcy can improve your financial situation significantly because of debt discharge. However, certain types of debts are not dischargeable, such as child support and alimony. Other types of debts generally not dischargeable include tax debts and student loans, unless the taxes owed meet certain requirements as older debts and the student loan debt meets certain other requirements, including that it causes undue hardship. Otherwise, you must generally pay these debts back whether you file Chapter 7 or Chapter 13.

Other types of debt, primarily consumer debt, are dischargeable. The most common type of liabilities the bankruptcy courts discharge include:

  • Medical bills
  • Credit card debt
  • Personal loans
  • Car loans
  • Some secured debts
  • Overdrawn bank account fees
  • Other loan debt

Upon a bankruptcy filing, there's generally an automatic stay imposed. This prevents creditors and debt collection agencies from harassing you.

What Will Happen to My Home if I File for Bankruptcy?

Knowing that most of your debt will disappear after the bankruptcy is a relief. But there are some drawbacks to filing as well. For example, you may lose your home or vehicle if you file for Chapter 7 bankruptcy.

Foreclosure or house repossessions are possible as you seek debt relief. This is not a given; most people can keep their homes in bankruptcy. But it's worth your time to talk to a lawyer about this.

On the other hand, if your income is high enough, you may be able to file for Chapter 13 bankruptcy. This allows you to include your mortgage payments on your repayment plan.

Can I Keep My Car or Other Property?

This is a fair question to ask. What happens to personal property during a bankruptcy proceeding depends on your specific circumstances. For example, property exemption laws may be available to you.

The exemptions only cover certain types of property. Many people can keep their cars because of state exemptions. Whether you can keep yours depends on the amount of debt you owe and your equity.

Will My Credit Card Debts Be Wiped Out?

Find out if the trustee will include your credit card debt in bankruptcy before you file by analyzing the following factors. The court will consider several factors when making this decision. For example, if you lied on a credit card application or spent well beyond your means, you may still be responsible for your credit card debt after bankruptcy.

Chapter 7 is the best way to get rid of credit card debt. Chapter 13 bankruptcy will require you to repay most of your debt over time in a repayment plan.

Are My Pension Plans and Paychecks Safe?

State law protects most pension plans and life insurance policies during bankruptcy as exempt property. Before filing for bankruptcy, ask if your pension plan (401(k), IRA) and social security will be safe.

The garnishment of your wages or bank accounts is likely to be stopped by a bankruptcy filing. A bankruptcy lawyer can try to prevent any issue with stopping this garnishment.

Will My Co-Signers Be Stuck with My Debt?

Unfortunately, if you file Chapter 7, your co-signers will still be liable for any debts you owe. You don't want to leave a co-signer stuck making payments on your debt.

Generally, your Chapter 13 bankruptcy automatic stay will protect co-signers from your debts, but your Chapter 7 will not.

Honesty and Assets in Bankruptcy Filings

Don't forget to list all your creditors on your bankruptcy schedules. If you don't include a debt, it will not disappear in bankruptcy through your discharge.

Don't sell or transfer assets to your friends or relatives to hide them from creditors or the bankruptcy court. The trustee will ask you about such transfers at the First Meeting of Creditors where the trustee examines the debtor on their assets and transfers. Trustees have the power to recover those assets.

Never try to defraud the bankruptcy court. You sign your bankruptcy schedules under penalty of perjury and are under oath at the first meeting of creditors.

The judge will dismiss your case if the court discovers you:

  • Omitted property from your schedule of assets
  • Failed to disclose material information
  • Lied on your schedules
  • Lied when testifying

The courts can also prosecute you for bankruptcy fraud if the courts discover any dishonesty.

Considering Bankruptcy? You May Want to Speak With a Lawyer First

Filing for bankruptcy can be more complicated than you think. The good news is that you don't have to do it alone. Contact a local bankruptcy law attorney to learn more about your options and how a lawyer can help get your financial life back under control.

Whether you're considering filing for bankruptcy or completing the petition, you'll want a legal expert to help you through the process.

Additional Bankruptcy Resources

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