Past due bills, mounting credit card debt, a recent job loss: if you are struggling with any of these issues, you might have considered filing for bankruptcy. You know the decision to file for bankruptcy shouldn’t be taken lightly. But how do you know if it’s the right choice for you?
When It Makes Sense to File for Bankruptcy
For some people, filing for bankruptcy can help to manage debt. If your liabilities (the amount you owe) exceed your income and assets (the amount you own), bankruptcy might be a good option. To determine your assets, collect statements for all bank and investment accounts, and decide whether you can sell any belongings to raise funds. Then gather all of your bills and loan documents to calculate your liabilities.
Next, make sure that bankruptcy will help you with your debt. If your mortgage or car loan is past due, Chapter 13 bankruptcy can give you a manageable payment plan or even reduce your loan amounts. And if you are facing foreclosure, bankruptcy can stop the process through an automatic stay, which halts most collection activities. In addition, the automatic stay prevents or delays other actions like utility shutoff and eviction.
Bankruptcy can also be an effective solution for unsecured debt such as credit card or medical bills. If you qualify for Chapter 7 bankruptcy, this type of debt is erased, and Chapter 13 bankruptcy establishes a payment plan and reduces balances. This lowered debt balance might help you make payments on more important debts like mortgages and car loans.
There are several other scenarios in which filing for bankruptcy could be the right choice. Bankruptcy’s automatic stay will end calls from creditors and collection agencies, for example. If you are unemployed, you may be more likely to qualify for bankruptcy to protect your property from debtors. And if your bankruptcy case is relatively straightforward, filing may be the best option. Yours is an uncomplicated case if, for instance, you make less than your state’s median income, you have few assets and you are up to date on tax filing and payments.
When It Makes Sense to Wait
In some situations, though, bankruptcy might not be helpful. Bankruptcy will not reduce your liability for certain types of debt, including newer tax debts, student loans, child support, spousal maintenance and criminal fines. Other factors—like a recently dismissed bankruptcy case or delinquent loan payments or tax bills—may complicate your bankruptcy case, which could impact your decision to file.
In other circumstances, it can be beneficial to wait to file. Waiting might increase your chance of eligibility if your income has recently dropped, since income qualifications for bankruptcy are based on average earnings over the last six months. You might also consider delaying bankruptcy if you believe you will have more debt in the near future. You may only file for bankruptcy once every eight years, so if you incur additional debt after you file, you will be liable for that new debt.
Impacts to Consider
As you weigh your options, be sure to consider how filing for bankruptcy will affect you. Bankruptcy stays on your credit report for up to 10 years and will hurt your credit score, although it can help you improve your score more quickly by providing a fresh start and affordable payment plans. Bankruptcy can also impact your property and assets. Most pensions, retirement accounts and public assistance payments are protected, but you may lose nonexempt property if you file Chapter 7 bankruptcy, for instance. (In New York, examples of exempt property include wedding rings, medical aids, up to $10,000 of personal property, and between $75,000 and $150,000 in home equity, depending on the county.)
Alternatives to Bankruptcy
Because the decision to file for bankruptcy is a serious one, you should also consider your other options. Contact your creditors to see if they can help, either through refinancing or by settling or reducing your debt. You might enlist the help of a nonprofit debt counseling service to help you negotiate. To end harassing collection calls, federal and state laws allow you to request that creditors stop contacting you for collection purposes. Finally, if you have little income and property, you may decide to do nothing; since you have no assets for creditors to take, you are considered “judgment proof.”
Deciding whether to file for bankruptcy can be overwhelming, but an experienced bankruptcy attorney can help you weigh your options and determine whether it is the right choice. If it is, making that first step can help relieve your financial stress.