When Should I File for Bankruptcy?

Despite what you may think, filing for bankruptcy is not the end of the world. It can give you the fresh start you need. The courts drafted the bankruptcy laws to give people a second chance, not to punish them.

With that said, you shouldn't file for bankruptcy at the first sign of financial distress. Regardless of the type of bankruptcy, you must consider the short- and long-term consequences of filing a bankruptcy petition. Bankruptcy is a last resort. The question is, when should you file for bankruptcy?

Here, we'll discuss how bankruptcy will impact your life. Sure, a bankruptcy discharge will get rid of most of your debt. It can also destroy your credit score. This article will explain how to decide whether bankruptcy is the best solution for you. Contact a skilled bankruptcy attorney near you if you choose to file a Chapter 7 or Chapter 13 bankruptcy case or if you need help deciding whether to file.

Evaluate Your Financial Situation Before You File

Many people in financial distress wonder if bankruptcy is the answer to their problems. Before you take this drastic step, you should consider your other options.

Some of these options include:

• Talk to a credit counseling agency
• Trying to negotiate your debt or make a payment plan with your creditor
• Debt consolidation
• Meeting with a debt management or debt relief company
• Creating (and sticking to) a budget

If you've tried these other options and they didn't work, bankruptcy may be the thing to give you the fresh start you desperately need.

What Is Bankruptcy?

Before we discuss whether bankruptcy is the best option for you, it's worth describing the bankruptcy basics. The bankruptcy process allows debtors to get rid of most of the debts preventing them from enjoying financial freedom.

To some, bankruptcy is an unfair way for people to clear their debt. After all, if you owe the money, you should pay it back. However, circumstances change. You may lose your job. A family member may become seriously ill. It's nobody's business why you need to file bankruptcy. That is something for the bankruptcy trustee to think about.

Once you decide to file bankruptcy, you must determine what type of bankruptcy you'll file. There are two main types of bankruptcy filings for individual debtors: Chapter 7 bankruptcy and Chapter 13 bankruptcy.

If you know that you'll never be able to repay your debt, Chapter 7 is the best option. With a Chapter 7 bankruptcy case, the court generally will discharge your debt, and you will no longer be responsible for it.

If you are in over your head but can handle a long-term repayment plan, Chapter 13 may be the best option. In a Chapter 13 bankruptcy, the trustee will devise a fair repayment plan lasting three to five years.

In most cases, debtors pay back a portion of their debts. For example, the bankruptcy court judge may agree that you should pay your creditors 80% of your debt. Once you complete your Chapter 13 monthly payment plan, the court will discharge the remainder of your debts.

How Do I Decide Which Chapter to File?

Choosing between Chapter 7 and Chapter 13 bankruptcy isn't easy. You and your bankruptcy attorney can discuss which option is best for you. Sometimes, a debtor initially files a Chapter 7 bankruptcy, only to learn that the trustee objects to their petition. If this happens, you may be able to amend your petition to a Chapter 13 bankruptcy.

Below, we'll discuss the two types of bankruptcy in more detail.

Chapter 7 Bankruptcy

Chapter 7, also known as "straight bankruptcy" or "liquidation," allows you to sell your nonexempt assets to pay off your debts. After that, you'll be free from all dischargeable debts. Not everyone qualifies for a Chapter 7 bankruptcy.

There are specific eligibility requirements that you must meet to qualify for Chapter 7 bankruptcy. Some of the scenarios where you will not be eligible for Chapter 7 include:

• Your income is too high to pass the "means test."
• You have the ability to repay your debt
• The court dismissed your previous bankruptcy case within the past 180 days
• You already filed for bankruptcy, and the time frame to file another bankruptcy case has not passed
• You attempted to defraud creditors

Chapter 13 Bankruptcy

People not qualifying for Chapter 7 can file a Chapter 13 bankruptcy. This type of bankruptcy case requires you to make a repayment plan and pay creditors over three to five years.

You must also show you comply with the eligibility requirements before you can file Chapter 13. These include:

• You are not a business organization
• You took a credit counseling course
• The court has not dismissed a Chapter 13 case you filed within the past 180 days
• You have not filed for a Chapter 13 within the past two year
• Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual's combined total secured and unsecured debts are less than $2.75 million as of the date of filing for bankruptcy relief. 11 U.S.C. § 109(e).

Findlaw's Chapter 13 Bankruptcy Section has specifics on whether you can qualify for a Chapter 13 bankruptcy.

Which Debts Can You Include in Your Bankruptcy?

Never assume that you can discharge all of your debts in your bankruptcy petition. It's true that, in a Chapter 7 case, most of your debt will be dischargeable. For example, the court will usually discharge your credit card debt. The same is true for most unsecured debts. However, usually, the lien securing your secured debt remains in place in a Chapter 7 case.

Secured debts are loans attached to property. They include mortgages, car loans, and personal secured loans. Unsecured debts are those that don't have any tie to property.

In your bankruptcy case, the court will typically discharge the following:

• Medical bills
• Personal loans
• Credit card debt
• Past due utility bills
• Some tax debts

Chapter 7 bankruptcy should also end any wage garnishments or bank levies.

The court may not discharge certain debts, such as:

• Alimony
• Child support
• Debts in foreclosure due to the lien on the property

For debts in foreclosure, the court may force you to surrender the property. It will depend on how far in arrears you are at the time of your bankruptcy filing.

Things You Should Know Before You File for Bankruptcy

Bankruptcy can solve most of your financial problems. However, it is not a cure-all. Before you decide to declare bankruptcy, you should consider a few things. These include:

Declaring Bankruptcy Will Affect Your Credit Score

In exchange for discharging your debt, filing bankruptcy shows everyone that you may be a credit risk. Your credit score will reflect this. After declaring bankruptcy, getting a loan, mortgage, or credit card may be very difficult. Also consider that if you are considering a bankruptcy petition, you must have mounting unpaid debts and your credit score is likely lower anyway.

You should also know that a Chapter 7 bankruptcy stays on your credit report for 10 years. Chapter 13 filings stay on your credit report for seven years.

Your Cosigners May Be Required To Pay Your Debts

Cosigners agree to pay your debt if you are unable/unwilling to do so. If you file a Chapter 7 bankruptcy, your creditors can pursue the cosigner for the debt, even if your bankruptcy case is successful.

Under Chapter 13, your creditors can't go after your cosigner if you make your debt payments on time.

Speak to an Attorney Before You File for Bankruptcy

If you are considering bankruptcy, you must have all the facts, especially since bankruptcy laws tend to be detailed and complicated. Speaking to a bankruptcy attorney near you may be the best way to protect your rights.

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