Is Bankruptcy a Good Idea for You?
Many factors should be taken into account when you are considering filing for bankruptcy. Bankruptcy is not for everyone. You may find that you do not need to file bankruptcy because you are judgment proof or you can fix your financial woes with a few simple changes. Or you may find that bankruptcy is the only way you can get true debt relief and start anew.
There are two types of bankruptcy most used by individual filers in the United States. You and your attorney can decide which one is right for you:
- Chapter 7 bankruptcy is a bankruptcy proceeding that can wipe out many of your debts in three to six months. However, you may lose some of your personal property.
- Chapter 13 bankruptcy requires a repayment plan based on your income. You will pay off as many of your debts as possible in the next three to five years, and then the court will discharge other debts.
The bankruptcy process takes time and dedication. Both options will affect your credit report, future interest rates, and lifestyle as you work towards a clean slate.
You should consider your situation carefully before deciding. An attorney is the best person to review your financial situation and advise you on your options.
Consider the points below before deciding on filing for bankruptcy and choosing which chapter is right for you.
Am I Eligible for Bankruptcy?
There are specific requirements that you must meet to file for each type of bankruptcy.
For example, you may not be able to file for Chapter 7 bankruptcy if your income is too high. You must meet what is called the Chapter 7 means test. Alternatively, if your income is too low or your debts are too high, you may not be able to complete a Chapter 13 repayment plan.
Many bankruptcy lawyers offer free consultations where they can walk you through your options and help you determine whether you qualify for bankruptcy.
Which of My Debts Won't Be Forgiven?
Certain types of debts such as student loans, child support, alimony, and tax debts cannot be wiped out through a bankruptcy proceeding. No matter whether you file Chapter 7 or Chapter 13, you will need to pay these back. Consider if your debt falls mainly into these types of debt.
If you have qualifying debt to dismiss, an "automatic stay" will stop creditor harassment on those debts during bankruptcy proceedings.
What Will Happen to My Home if I File for Bankruptcy?
Getting some debts forgiven can make it easier to make mortgage payments. However, you may lose your home 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 home in bankruptcy. But it is 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?
What happens to other property during a bankruptcy proceeding will depend on:
- What you've done with it
- The property exemption laws that are available to you
For example, if you put up your boat as collateral on a loan, it makes that loan secured. The creditor may still be able to take your property even if you are in bankruptcy.
Also, only certain types of property are protected by exemption laws in Chapter 7 bankruptcies. Many people are able to keep a car because of state exemptions, but whether you can keep yours depends on the amount of debt and equity you have in it.
Will My Credit Card Debts Be Wiped Out?
You should figure out if your credit card debt will be wiped out by a bankruptcy proceeding before you file. If you lied on a credit card application or spent well beyond your means, bankruptcy may not be able to forgive your credit card debt.
Chapter 7 is the best way to get credit card debt discharged. Chapter 13 bankruptcy will require you to repay most of the debt.
Are My Pension Plans and Paychecks Safe?
Most pension plans and life insurance policies are protected by state laws in a bankruptcy proceeding. Before filing for bankruptcy, ask if your pension plan (401(k), IRA) and/or life insurance policies will continue to be protected.
Some situations allow lenders to take wage garnishments from your paycheck. This might be unavoidable in your bankruptcy case, but a bankruptcy lawyer can work to keep control of your paychecks in your hands.
Will My Co-Signers Be Stuck With My Debt?
You should go back through all of your debt agreements to review any co-signers.
You do not want to leave a co-signer for any of your loans stuck making payments on your debt. Generally, Chapter 13 bankruptcy will protect any co-signers from your debts, but Chapter 7 will not.
Will My Personal Life Be Invaded?
For bankruptcy to work, you will have to show the bankruptcy court every aspect of your financial life. Also, other people may find out about your bankruptcy.
In Chapter 7 bankruptcy, some of your personal property could be taken and sold to pay off your debts. In Chapter 13 bankruptcy, you will probably have to ask permission to spend your own money for the next three to five years.
What About My Business?: Consumer Bankruptcy for Business Owners
Admitting that your business is in financial trouble is difficult. Be sure to access your company's current financial statements, such as balance sheets, profit and loss statements, projections, and other important information.
Let your creditors know that you are having problems. Your creditors are like every other business — they need customers and want them to succeed. If you are honest with your creditors, they will be more willing to work with you.
Reviewing Your Bankruptcy Business Case
You can expect to spend considerable time and energy helping your bankruptcy attorney with paperwork. You will need to help complete your company's petition and schedules and represent your company throughout the case.
Have your books and records in order before consulting with your attorney. You can lower your legal expense substantially by being organized and doing much of the "leg work" yourself.
Bankruptcy vs. Closing Down Your Business
It is smart to have at least a preliminary idea of what you expect a bankruptcy to accomplish for your company. You should have realistic expectations regarding bankruptcy and how it can help your company.
If there is no demand for your product, bankruptcy reorganization won't help. Bankruptcy can't make your company profitable, and you can't expect bankruptcy to cure all of your company's financial problems.
Honesty and Assets in Bankruptcy Filings
Be careful not to forget to list a creditor on your bankruptcy schedules. Whether intentional or not, the debt to that unscheduled creditor will not be discharged in bankruptcy.
Be sure not to 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. They have the power to recover those assets.
Never try to defraud the bankruptcy court. You sign your bankruptcy schedules under penalty of perjury, and you are under oath at the first meeting of creditors.
Your case will be dismissed if the court discovers that you:
- Failed to list a property
- Omitted material information
- Lied or cheated on your schedules
- Lied when testifying
You can also be prosecuted for bankruptcy fraud if the courts discover any dishonesty.
Considering Bankruptcy? You May Want to Speak With a Lawyer First
You don't have to try to unravel these legal and practical decisions 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 are thinking about filing for bankruptcy or in the process of completing the petition, you'll want a legal expert to help you through the process.