No one ever thinks they'll have to file bankruptcy.
But what if unexpected life events (i.e. medical emergency, divorce, COVID-19) turn your personal financial situation upside down, making it impossible to pay your bills?
When debt gets out of control, bankruptcy should at least be considered as a possible solution.
Let's look at the facts and when a person should consider filing bankruptcy ...
There are numerous "chapters" of bankruptcy. This article focuses on the two chapters of personal bankruptcy -- Chapter 7 and Chapter 13.
Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 is considered the "liquidation" bankruptcy. If you qualify, your debts are wiped out. Poof. Gone.
Debts that can be discharged via Chapter 7 are unsecured debts -- credit card debts, medical bills, personal loans, etc.
Debts that cannot usually be discharged via Chapter 7 include past due child support, alimony and certain types of taxes.
To qualify for Chapter 7, you have to pass a means test to confirm you really are unable to pay and that your debts should be forgiven. If the means test determines you do have the ability to pay (at least some of) your debts, Chapter 7 is off the table and you'll have to pursue Chapter 13.
Chapter 13 is considered a "reorganization" bankruptcy. This is where you set up a court-approved monthly payment plan to pay your creditors what you can afford, typically over 3-5 years. Your monthly payment amount is based on your ability to pay.
If you successfully complete your Chapter 13 repayment plan, your remaining debts are then usually discharged (i.e. forgiven).
(Ref: Nolo.com, UScourts.gov)
Pros and Cons of Bankruptcy: Chapter 7
As with anything, no solution is perfect ...
Pros of Chapter 7:
Cons of Chapter 7:
Pros and Cons of Bankruptcy: Chapter 13
Pros of Chapter 13:
Cons of Chapter 13:
Bankruptcy FAQs
There are 2 expenses to filing bankruptcy >> court filing fees + attorney fees. Court filing fees are usually around $300-400. Attorney fees, on the other hand, vary tremendously so it pays to shop around. For a Chapter 7 filing, expect to pay $1,000-$1,500 in attorney fees, give or take. For a Chapter 13 filing, attorney fees will probably be around $3,000-$3,500 because there's more work involved than with a Chapter 7 filing.
Most Chapter 7 bankruptcies take 3-6 months to complete. With Chapter 13 bankruptcy, it takes about 90 days for your reorganization plan to be approved by the Court, then another 3-5 years to complete the reorganization plan.
Maybe. In most states, a landlord has to take legal action to evict you. If you file bankruptcy before your landlord is awarded an eviction judgment that usually halts the eviction. For more info click here.
In most cases, bankruptcy stops a wage garnishment.
In some cases, yes. It depends on what kind of taxes you owe. If you owe income taxes, they can usually be discharged with Chapter 7 as long as those income taxes are (a) more than 3 years old, and (b) you've filed tax returns during the past 2 years. For more info, click here.
It can. Bankruptcy's automatic stay can stop a pending foreclosure, but you can't wait until the last minute. If you file bankruptcy after the foreclosure sale date, it's too late.
A Chapter 7 bankruptcy will only temporarily stop the foreclosure process. Once your Chapter 7 bankruptcy process is complete, you'll need to try and negotiate a solution with your mortgage lender if you want to keep your home.
With Chapter 13 bankruptcy, you can propose a repayment plan on your past due mortgage as part of your overall debt restructuring plan.
For more info on bankruptcy and foreclosure, click here.
Most of the time, yes. Once again, the mechanism stopping the lawsuit is the automatic stay.
Examples of lawsuits that are not stopped by an automatic stay are criminal lawsuits or ones involving divorce or child custody.
Yes, medical bills can be included in a Chapter 7 or 13 bankruptcy.
Technically, student loans can be discharged via bankruptcy. But realistically it's going to be difficult because you have to prove that continuing to pay on your student loans would cause an undue hardship.
Hopefully the bankruptcy laws will be reformed in the near future to include student loans. In January 2019, the U.S. Congress introduced H.R. 770, the Discharge Student Loans in Bankruptcy Act of 2019. But that's as far as it's gone. At least it's on the table for consideration, which is encouraging.
In most cases, yes, but it depends.
Chapter 7: If you still owe money on your car and you want to keep your car, you can enter into a reaffirmation agreement with your car lender. This takes your car out of your bankruptcy proceeding and you just continue making monthly payments to your car lender.
If you own your car free and clear, you need to protect your car by claiming a bankruptcy exemption. Otherwise the bankruptcy trustee could force you to sell your car and use the proceeds to pay your creditors.
If you are leasing your car, you can keep your car lease active by completing a Statement Of Intention saying that you plan on making the lease payments until the end of the lease. If you want to reject (i.e. terminate) the lease, you would complete the Statement Of Intention by saying that you can no longer afford the lease payments and you want to turn in your car.
Chapter 13: If you still owe money on your car, you would just factor this in as part of your overall Chapter 13 reorganization plan.
Once again, it depends.
Chapter 7: With a Chapter 7 bankruptcy, you can keep your house if (a) your mortgage is current, or (b) the state where you live allows you to exempt your house from bankruptcy. If you own your home free and clear (or have significant equity) the bankruptcy trustee could require you to sell your house and use the proceeds to pay your creditors.
Chapter 13: If you still owe money on your mortgage and you want to keep your house, you would just factor this in as part of your overall Chapter 13 reorganization plan.
Short answer, yes, but there are numerous situations to consider.
If the debts you want to discharge are only in your name, then it might make sense for you to file bankruptcy without your spouse.
However, if you live in a community property state, your spouse's assets could be at risk. Also, if you and your spouse jointly own assets (car, house, boat, etc), but only you file bankruptcy, creditors will then pursue your spouse for the unpaid debt.
Technically, you can file bankruptcy on your own without a lawyer. But as the saying goes, "A person representing themselves has a fool for a client."
Legal matters, especially bankruptcy law, are complex and confusing. So trying to save a few bucks on legal fees could end up costing you a lot in the long run.
For that reason, it is strongly recommended to retain a competent attorney to assist you with bankruptcy.
In most jurisdictions, consumers are not allowed to file bankruptcy online. Usually only attorneys are permitted to file bankruptcy online.
As with the answer to the previous question, it is strongly recommended to retain a competent attorney to assist you with bankruptcy. The risk is high that you'll mess something up, and it's just not worth the relatively small amount of money you might save on attorney fees by trying to file bankruptcy yourself.
After completing a Chapter 7 bankruptcy, you must wait 8 years before filing Chapter 7 again and 4 years before filing Chapter 13..
After completing a Chapter 13 bankruptcy, you must wait 6 years before filing Chapter 7 and 2 years before filing Chapter 13 again.
The means test determines who is eligible to file Chapter 7. If the means test determines you are not eligible for a Chapter 7 discharge, your "plan b" is to restructure your debts via Chapter 13.
When a debt is discharged, that means it is forgiven and you are no longer liable for that debt.
A bankruptcy dismissal is when your bankruptcy case is terminated by the Court.
For example, if you change your mind and don't want to go through with your bankruptcy after you file the papers, you can request a voluntary dismissal.
If you fail to pay the bankruptcy filing fee, or fail to submit the mandatory paperwork on time or fail to do any other required event, the Court can terminate your bankruptcy with an involuntary dismissal.
A Chapter 7 bankruptcy filing can legally remain on your credit report for up to 10 years, and a Chapter 13 up to 7 years.
You can request that the bankruptcy listing be removed from your credit report if it is found that the listing is inaccurate. Unfortunately you can't remove it just because you don't want it there.
If you feel there are errors on your credit report regarding your bankruptcy filing, you have the right to challenge those errors. Then, if the credit reporting agency cannot validate the bankruptcy listing on your credit report, they must remove that information.
For more information on legal and legitimate credit repair, please visit the Lexington Law Firm website.
Life After Bankruptcy
There's no shame in filing bankruptcy and it doesn't ruin your life.
If anything, bankruptcy can save your life and give you a second chance.
The main question people usually have after filing bankruptcy is, "How long does it take to rebuild your credit?"
Before focusing too much on rebuilding your credit after bankruptcy, you really should reflect a bit on your lifestyle and spending habits to make sure you don't end up in the same financial predicament a few years down the road. For example ...
When you're ready to start rebuilding your credit, it's not rocket science. Here are the steps:
- 1Stay out of debt. Don't rack up a bunch of new charges. Your debt-to-income ratio is a big component of your credit score. Keep your new debt load to a minimum.
- 2Pay on time. You want to demonstrate to future creditors that you have a track record of paying bills on time. If your credit cards were cancelled as part of your bankruptcy, you might need a secured credit card. Here's a good resource for getting a secured credit card.
- 3Consider a credit repair service. As long as you don't get into financial trouble again, your credit report will heal over time. But if you want to try and accelerate the credit repair process, check out Lexington Law Firm. I've been referring our clients to them for years.
How To Get Out Of Debt Without Filing Bankruptcy
If you feel filing bankruptcy is too drastic, there are alternatives:
Debt Consolidation
With debt consolidation, the objective is to save money by reducing the interest rate on your outstanding debt.
If you’re fortunate enough to own a home or property with equity, you can get a low-interest debt consolidation loan to pay off your high-interest debts. You won’t get any debt relief, but you will save money on interest rate charges.
Another option is to enroll in a Consumer Credit Counseling Service (CCCS). These are non-profit agencies that have existing relationships with most major financial institutions. You make one monthly payment to the CCCS, then they distribute your funds proportionally to your creditors. While enrolled with a CCCS, your creditors usually agree to a slightly reduced interest rate.
Debt Settlement
A more aggressive bankruptcy alternative is to negotiate settlements with your creditors.
Done right, creditors will often accept $0.30-0.50 on the dollar.
Unfortunately it's going to take more than a simple phone call to get these kind of results because creditors are not going to write off thousands (or tens of thousands) of dollars without considerable resistance.
Also, each creditor requires a different negotiating strategy. What works with one creditor often doesn't work with another.
Debt settlement is what Donaldson Williams specializes in. Over the years, we've helped our clients obtain millions of dollars in debt relief without the need to file bankruptcy.
If you'd like to request a free, confidential phone consultation to see what we could do to help you click here.
Conclusion
After doing exhaustive research and contemplation you conclude there's really no way out of your current financial crisis other than filing bankruptcy, then do it.
Just like discovering you have a serious but treatable medical condition, you shouldn't wait around to "see what happens". You need to take action ASAP and take control before it's too late.
I've talked to thousands of people in financial distress and the # 1 reason they want to avoid bankruptcy is a sense of personal responsibility -- which is a noble and honorable thing.
But if the math simply doesn't add up and you have to file bankruptcy, there's nothing to be ashamed of. Stuff happens.
Life is short and bankruptcy exists to give people a fresh start.
