Let me tell you about a common scenario I encounter. It’s near the end of a bankruptcy deliberation and I’ve delivered my speech on the pros and cons of bankruptcy proceedings, the difference between Chapter 7 and Chapter 13 filings and what not. I ask my prospect if he has any more questions, to which he replies, “Well, do you think I should file for bankruptcy?”
Let me start by saying that I simply cannot answer this question. I will do my best to provide you with all the bankruptcy knowledge you need, but ultimately you must make that decision yourself. Don’t get me wrong, if you let me, I’ll talk ad nauseam, consider your options, and advise you to the best of my ability. But in the end, it’s ultimately your decision.
With that in mind, I’ve put together some general points to think about when trying to decide whether or not you should file for bankruptcy protection.
Have you already tried to negotiate? Creditors are often willing to work with you by compromising payment plans or perhaps lowering interest rates. You say you tried it once and got rejected? Call again and speak to someone new. I have found that when negotiating with creditors it often takes perseverance to achieve a lot. Most of the time, however, creditors are willing to work with you, especially if the account is in arrears. At the end of the day, they just want to get paid for something.
How do your liabilities compare to your assets? It’s especially important when filing for Chapter 7 bankruptcy that you have an idea of the value of your non-exempt assets and total liabilities. Remember that under Chapter 7 of Bankruptcy Protection, a trustee will liquidate your non-exempt assets for partial performance to your creditors. In general, bankruptcy makes the most sense when your debts exceed the value of those assets.
What are your debts? Remember that filing for bankruptcy is not a panacea and certain categories of debt are not forgiven. The most common non-refundable debts I see are student loans, alimony, and child support. There are others, so be sure to raise this with your bankruptcy attorney.
What is your wealth? If you file for Chapter 7 bankruptcy, your assets are categorized as
either exempt and unavailable to the trustee, or non-exempt and included as part of the bankruptcy estate. How do these two categories compare in your particular case?
Lose your house or car? Remember, you are only allowed to have a maximum amount of tax-exempt equity in various assets, including your home and car. If your current equity exceeds this number, your asset may be sold to partially repay your creditors.
Is your salary being garnished? Insolvency may be indicated if certain creditors have already received judgments against you and your wages are seized as a result. Often, filing for bankruptcy can suspend the garnishment of wages and provide immediate relief in such cases.
Have you been sued? Even if there is currently no judgment against you, bankruptcy may be proposed in situations where a future judgment can be avoided (see attachment of wages above).
How are your savings distributed? The money in the savings/checking account is available to the trustee, in order to prevent it from entering the bankruptcy estate, you must spend it below the permitted allowance. However, money distributed between IRAs and 401(k)s is often protected.
Do you have co-signers for your debt? While filing for bankruptcy removes your liability for debt relief, your co-signers may remain liable. This may affect your decision to file, as your friends or family members would then be burdened with your debt.
How does a bad credit score affect you? Filing for bankruptcy can negatively affect your credit rating. However, the decline in numbers is often less than expected. This is especially true if you already have one or more arrears that have been reported to the credit agencies. Nonetheless, in today’s hostile lending environment, you can expect a period of years where you will struggle to obtain credit.
Do you have extra money every month? I always tell my clients that if they haven’t already done so, they should create a monthly budget. Include all necessary expenses, but leave out your debt and unnecessary expenses. How much is left each month? Is it enough to pay off your debt at current interest rates? What about lower interest rates?
How old are they? How long do you have to rebuild your savings before retirement? It’s by no means a hard and fast rule, but age can sometimes correlate with the need to file for bankruptcy.
How many relatives do you have? I often appreciate that clients without dependents can reduce their monthly expenses and pay off their debts more easily than those with dependents. On the other hand, the median income level for Chapter 7 bankruptcy is based on household size and thus could determine your eligibility for bankruptcy.
Theses are not rules set in stone either. Instead, they are simply points to consider. As always, I recommend speaking to a licensed bankruptcy attorney and thoroughly discussing all your options before making a decision. If you have any questions, please feel free to call me or visit my website and use our live online chat feature.