Although your debts may seem overwhelming, before you file for bankruptcy you need to carefully consider your situation and your options. Among the factors you should consider are,
- Whether your debts are dischargeable in bankruptcy, or if they're among the categories of debt that you won't be able to discharge;
- Whether it makes sense to keep part of your debt, or to seek discharge of all of your debts;
- The relative costs and benefits of bankruptcy as compared to other options, such as trying to negotiate directly with your creditors;
- How a record of bankruptcy will affect your financial future, including your ability to purchase a home if you move;
- How a bankruptcy will affect your job and your future employment opportunities; and
- Whether you will qualify for a discharge of your debts through a Chapter 7 discharge, or if you will be tied to a multi-year Chapter 13 repayment plan.
You must also consider whether the types and amount of debt you hold, your income, or the nature of your assets either limit your options, or make one option clearly superior to the others.
Are Your Debts Dischargeable in Bankruptcy
Some debts are not dischargeable in bankruptcy, or are dischargeable only under very narrow circumstances. Debts that are privileged in that manner include child support, spousal support, most debts owed to the government, court fines, tax debts, and federally guaranteed student loans. A debtor whose debts are largely nondischargeable may gain little benefit from filing for bankruptcy protection. Your lawyer or credit counselor will help you review your debts to determine whether they qualify for discharge.
Even if your debts are mostly nondischargeable, that doesn't necessarily mean that you should rule out bankruptcy. A Chapter 13 bankruptcy allows you to reorganize your debts and pay them off in monthly installments, and some debtors benefit from that restructuring even if their repayment plan involves their ultimately repaying 100% of their debts.
Do You Want To Keep Your Debt
A secured debt is a debt that is secured by collateral, such as a home mortgage or car loan, while unsecured debts are not secured by collateral.
- Most consumer debts, including most credit card debts, medical bills, legal fees, and utility bills, are unsecured debts, and are subject to discharge in bankruptcy.
- Secured debts are not ordinarily discharged in bankruptcy unless the debtor surrenders the collateral.
As strange as it may initially 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 indispensable, and would thus exclude from your discharge or repayment plan, you should consider options other than bankruptcy or discuss with your bankruptcy lawyer options that might allow you to keep the property while still benefiting from bankruptcy.
Is The Cost Of Bankruptcy Greater Than The Benefit
A discharge of your debts through bankruptcy will not simply wipe clean your financial slate, such that you get to start over with a clean credit record.
Most debtors who declare bankruptcy remain obligated to pay at least part of their debts, and run a risk of having some of their personal property taken and sold with the proceeds used to satisfy debts.
A bankruptcy discharge will appear on the debtor's credit report, with a significant negative impact on the debtor's ability to later obtain credit as well as the cost of credit. Depending upon a debtor's circumstances, the bankruptcy will appear on their credit record for between seven and ten years.
What Will Happen If You Have Additional Financial Problems
If your problems emerge from your lifestyle, as opposed to a sudden or unexpected setback or catastrophe, think carefully before declaring bankruptcy. When a bankruptcy is brought on by a specific crisis such as a business failure, job loss or catastrophic illness, the bankruptcy may be exactly what you need to get back on your feet.
However, if the bankruptcy comes from lifestyle choices that boil down to routinely spending more than you earn, you must ask yourself what will happen after your bankruptcy. If you mismanage your finances after a bankruptcy discharge, you may find yourself in a worse position than if you never filed for bankruptcy and also be subject to a multi-year waiting period before you are again eligible to file for bankruptcy protection.
What Will Happen At Work
Many employers review credit reports before hiring or promoting their employees. If an employer sees a bankruptcy on your credit record, the bankruptcy may raise questions about your financial judgment, and may even raise concerns about theft or embezzlement.
Even if an employer's concerns are unfounded, you may find yourself in an uncomfortable position, explaining the facts of your bankruptcy to your employer in order to overcome a negative inference.
A bankruptcy may also affect your ability to obtain or keep employment in the financial industry, or your ability to qualify for a security clearance.
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, particularly before you rebuild your post-bankruptcy credit, substantially increase the costs and interest rate associated with the mortgage. It may similarly prevent you from successfully renting the home or apartment you desire.
Consumer bankruptcy normally involves a 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 that outlines the terms and conditions of each form of bankruptcy.
When evaluating whether or not to file for bankruptcy, and what form of bankruptcy to pursue, most people will benefit from consulting a bankruptcy lawyer.
Chapter 7 ("Straight Bankruptcy" or "Liquidation")
When people think of bankruptcy, most people think of a Chapter 7 bankruptcy. In this form of bankruptcy:
- A trustee is appointed to oversee your property on behalf of your creditors;
- Some of your assets may 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 or all debts are cancelled.
When a person filing for Chapter 7 bankruptcy has no income or assets that can be applied to their debt, the process is deemed a no asset bankruptcy.
Prior to filing a Chapter 7 bankruptcy, you must go through credit counseling. Your income and assets will also be reviewed under a means test that assesses your ability to repay your debts. If under the terms of that test you are determined to have sufficient income or resources to partially repay your debts you will not be able to file for a Chapter 7 discharge.
If you have filed and dismissed a bankruptcy petition within the prior 180 days, or have been granted or denied a Chapter 7 discharge by a bankruptcy court within the past six years, you will probably be unable to file a Chapter 7 petition.
If you believe you may be excluded from filing for Chapter 7 protection, discuss the facts of your situation with your bankruptcy lawyer 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, in most cases involving monthly payments over a period of three to five years;
- Your repayment plan will involve your paying a percentage of your debts based upon your disposable income, the money you have left over after paying your reasonably necessary expenses each month;
- During the repayment period all of your disposable income will be applied toward your debts;
- If your repayment plan is 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 pay the trustee's fee as part of your repayment plan; and
- If you complete the repayment plan, any remaining portion of debts included in the plan will be discharged.
Chapter 13 bankruptcy can be particularly useful to a debtor who is dealing with a short-term financial crisis, and whose income is likely to grow in the future.
Although the limits are well in excess of the amounts owed by most debtors, there are debt-based restrictions on who may file for Chapter 13 bankruptcy, based upon the amount of the debtor's noncontingent, liquidated debt.
- A debt is contingent if it is payable based upon the occurrence of a future event that may not happen, and is otherwise noncontingent.
- A debt is liquidated if the amount of the debt can be calculated as an exact cash value.
As of April 1, 2016, in order to qualify for Chapter 13 bankruptcy you must hold less than $394,725 in noncontingent, liquidated unsecured debt, and less than $1,184,200. in noncontingent, liquidated secured debt. Although not normally filed by individuals, a Chapter 11 bankruptcy may be available to a consumer whose debts exceed the Chapter 13 limits.
If you have filed and dismissed a Chapter 13 bankruptcy petition within the past 180 days, you will likely be unable to file another Chapter 13 petition until that period expires. If that restriction applies to you, you should discuss with your lawyer whether you might qualify for an exception.
If you file a Chapter 13 bankruptcy petition, your bankruptcy lawyer will help you propose a budget that is likely to be approved by the bankruptcy court.
- You should carefully consider the budget when deciding whether to file for Chapter 13 bankruptcy, as most debtors find themselves unable to comply with the strict enforcement of their budgets over the full Chapter 13 repayment plan.
- When debtors cannot complete the repayment plan their cases will be dismissed, and they will again be subject to collection of the full balance due on any of the debts that were included in the bankruptcy.
Corporations and partnerships cannot file a Chapter 13 bankruptcy, but may seek restructuring under Chapter 11 of the Bankruptcy Code.
Due to the nature of personal bankruptcy litigation, which involves a lot of documentation and paperwork and a series of court hearings, most lawyers who accept bankruptcy cases do so on a volume basis. When you are looking for a bankruptcy lawyer, you will normally benefit from hiring a lawyer who handles a lot of bankruptcy cases, and has good systems in place for processing bankruptcy forms and filings.
You may seek a referral to a bankruptcy attorney from a lawyer you know and trust. If that is not possible, bankruptcy lawyers who have volume practices are usually pretty easy to find through their advertisements. For general information about finding an hiring a lawyer, you may wish to read this article: How to Hire an Attorney.
For a more simple bankruptcy case, a lawyer may charge a fixed fee to handle the entire case from petition through discharge. For more complicated cases, the lawyer may charge an hourly fee, or an initial flat fee with additional fees based upon the amount and type of work required to complete the case.
A bankruptcy lawyer's fees are subject to review for reasonableness as part of the bankruptcy process, providing the debtor with some protection from concerns about being charged an excessive fee.
The Bankruptcy Court for your jurisdiction, along with official bankruptcy forms, information about court procedures, instructions for handling your own bankruptcy, and filing fees, can now be found through the U.S. Courts official court locator.