Before you file for bankruptcy, there are some important initial considerations which may affect your ultimate decision on filing, and the form of bankruptcy you choose. Important initial considerations include whether or not your debts are dischargeable in bankruptcy, whether you want to keep part or all of your debt, the relative costs and benefits of bankruptcy, your financial future after bankruptcy, the possible effect on your employment and prospective employment, and how your credit record may affect your ability to rent or purchase a residence in the event that you move.
Are Your Debts Dischargeable?
You may find that, due to the nature of your debts, filing for bankruptcy will not provide you any relief. Your lawyer or credit counselor can help you review your debts to see if they qualify for discharge.
Do You Want To Keep Your Debt?
A "secured debt" is a debt that is secured by collateral, such as a mortgage or car loan. Most consumer debts are "unsecured," such as most credit card debts, medical bills, legal fees, and utility bills. Secured debts are not ordinarily discharged in bankruptcy unless you surrender the collateral.
As strange as it may sound, you may not want all of your debts to be resolved through the bankruptcy. For example, you may not want to give up your car, and thus may agree to continue paying your car loan, rather than seeking relief from that debt. If your debts are primarily for items that you consider indispensible, you may wish to pursue other options.
Is The "Cost" Of Bankruptcy Greater Than The "Benefit"?
Declaring bankruptcy does not simply wipe your financial slate clean, allowing you to startover with a clean record. Most debtors are required to pay at least part of their debts, and run a risk of having some of their personal property used to satisfy debts. The bankruptcy will be placed on your credit record, and will make it difficult to obtain credit for years. (Depending upon your circumstances, the bankruptcy will appear on your credit record for between seven and ten years.)
What Will Happen If You Have More Financial Problems?
If your problems emerge from your lifestyle, as opposed to a sudden or unexpected catastrophe, think carefully before declaring bankruptcy. It is one thing to come out of an unexpected business failure, job loss, or catastrophic illness, and need to get back on your feet. However, if your problem is that you simply spend too much, you must ask yourself what will happen after your bankruptcy, as you will most likely be barred from obtaining any additional relief in bankruptcy for at least six years. If you mismanage your finances during that time, you may find yourself in a worse position than if you never filed for bankruptcy.
What Will Happen At Work?
Many employers review credit reports before hiring employees or giving them promotions. A bankruptcy will raise questions about an employee's financial judgment, and may even raise concerns about theft or embezzlement. Even if those concerns are unfounded, you may find yourself in an uncomfortable position, explaining the facts of your bankruptcy to your employer.
What Will Happen If You Move?
Many landlords, and all banks, will check your credit when you seek to rent premises or obtain a mortgage. A bankruptcy may prevent you from obtaining a mortgage, or substantially increase the costs and interest rate associated with the mortgage. It may prevent you from renting the home or apartment you desire.
Most individuals will choose between filing a "Chapter 7" bankruptcy and a "Chapter 13" bankruptcy. The term "chapter" is derived from the chapter of the U.S. Bankruptcy Code which outlines the terms and conditions of each form of bankruptcy.
Chapter 7 ("Straight Bankruptcy" or "Liquidation")
When people think of bankruptcy, they have historically thought in terms of a "Chapter 7" personal bankruptcy. In a "Chapter 7" bankruptcy:
- A trustee is appointed to oversee your property;
- Some of your assets will likely be surrendered to the trustee, who will sell them to pay your creditors;
- Depending upon the laws of your state, you will be allowed to keep some personal property, and probably an interest in your home (although perhaps not all of your equity).
- Most debts are cancelled.
There are now also income restrictions on who will qualify for a Chapter 7 discharge, effective as of October, 2005. Assuming those restrictions do not apply, you will most likely be unable to file a "Chapter 7" bankruptcy if you have filed and dismissed a "Chapter 7" petition in the last 180 days, or if you were granted or denied a "Chapter 7" discharge in a prior case within the past six years. You should discuss your case with an attorney, as you may qualify for an exception.
Chapter 13 ("Wage-Earner Bankruptcy")
In a "Chapter 13" Bankruptcy:
- You will propose a repayment plan for your debts;
- If approved by the court, a trustee will be appointed to collect your payments, distribute them to your creditors, and to supervise your compliance with the repayment plan.
- You will have to pay the trustee's fee, which can be substantial.
Debtors whose debts exceed certain limits are barred from seeking Chapter 13 bankruptcy. (At the time of this writing, in order to file a "Chapter 13" bankruptcy, you must owe less than $360,475 in noncontingent, liquidated, unsecured debts, and less than $1,081,400 in noncontingent, liquidated, secured debts. You will most likely be unable to file a "Chapter 13" bankruptcy if you have filed and dismissed a "Chapter 13" petition in the last 180 days, and should discuss any prior filing with your attorney. You should also take care to propose a reasonable budget, as most debtors find themselves unable to comply with the strict enforcement of their "Chapter 13" plans, and end up dropping out of bankruptcy before their plan is completed.
This type of bankruptcy can be particularly useful when a debtor believes that his financial crisis is temporary, and that his income will continue to grow in the future. Corporations and partnerships cannot file a "Chapter 13" bankruptcy.
Most people will benefit from consulting with a bankruptcy lawyer, when determining which form of bankruptcy they should pursue.
Due to the nature of personal bankruptcy, most lawyers who accept bankruptcy cases do so on a volume basis. For simple bankruptcies, the lawyer may charge a fixed fee for the entire case. These fees are subject to review for reasonableness as part of the bankruptcy process, providing you with some protection from concerns about being charged an excessive fee.
When you are looking for a bankruptcy lawyer, you will typically benefit from hiring a lawyer who handles a lot of bankruptcy cases, and has good systems in place for processing bankruptcy forms and filings. If you are able, you may wish to seek a referral to a bankruptcy attoreny from a lawyer you know and trust. If not, this is a category of lawyer that is often easiest to find through your local Yellow Pages.
For general information about hiring a lawyer, you may wish to read this article: How to Hire an Attorney.
The Bankruptcy Court for your jurisdiction, along with official bankruptcy forms, information about court procedures, and filing fees, can now be found through an official online directory, at http://www.uscourts.gov/bankruptcycourts.html.