When Should Someone Consider Filing Bankruptcy?

Bankruptcy can accomplish many goals, from bringing you relief from intrusive creditors to protecting your property.

When you’re considering bankruptcy as an option, chances are you are experiencing some level of financial stress, such as struggling with overwhelming debt due to medical issues, loss or income, or divorce. If that’s the case, you’re not alone. Studies indicate that in more than 50% of bankruptcy cases, the debtor (the person filing the case) has experienced at least one of those events. Even though the idea of filing for bankruptcy can be scary, it might be the most efficient and logical solution to your money problems.

When a Credit Counselor Won’t Help

Bankruptcy comes with both benefits and serious consequences alike. It’s important to explore all reasonable options for managing your debts before you make a decision. For instance, you’ll want to the weigh the benefit of discharging (wiping out) your qualifying debts against the consequences, like restrictions on getting further credit and a significant hit to your credit score.

Many people start considering bankruptcy when they realize that they might never be able to pay off their outstanding credit card balances without some help. If you’re making just the minimum payments on credit card debt that has a high-interest rate, it could take you a decade or longer to pay off just one balance. It might be worthwhile to talk with your creditors about reducing your interest rate of setting you up on a repayment plan designed to get you out of debt.

Some people enlist the aid of a credit counselor to negotiate with creditors to reduce interest rates, lower payments or get more time to pay off the debt. If successful, you’ll make one monthly payment to the agency, which distributes it to your creditors. However, credit counselors are limited in what their programs can accomplish compared to a Chapter 7 or Chapter 13 bankruptcy.

When You Need to Stop Creditor Actions

If your creditors are overwhelming you with demands or threatening legal action, a provision in the bankruptcy code called the “automatic stay” can help prevent creditors from taking action to collect debts. The stay ensures that most collection efforts must stop as soon as you file a Chapter 7 matter or ,including:

  • the foreclosure of your home
  • a repossession of your car
  • most civil lawsuits, and
  • wage and bank account garnishments.

The automatic stay isn’t permanent, and creditors might have the right to ask the bankruptcy court for permission to continue collection efforts later. But, the automatic stay is a powerful tool to use when you need some breathing room. It works by giving you the opportunity to take control of your financial situation.

When You Need to Eliminate Debt

The purpose of bankruptcy is to provide debtors with a fresh financial start. Your relief can come in as few as four to six months with a Chapter 7 case or stretch out as long as five years in a Chapter 13 case. When the bankruptcy case is over, most of your debt—such as credit card balances, medical bills, and personal loans—will be forgiven and you can begin the process of establishing good credit.

Some debts are nondischargeable (can’t be forgiven) in a bankruptcy case. Even so, you can use bankruptcy to make payments more affordable or to reduce interest and penalties. For instance, you might be able to discharge older income taxes in a Chapter 7 case or pay off more recent income taxes through a Chapter 13 plan.

Also, although student loans rarely go away in bankruptcy, filing for Chapter 7 bankruptcy can free up resources you can use to pay student loan debt, or, you can file a Chapter 13 case to (temporarily) reduce your payment on high balance loans.

When You Need to Protect Property

When you file bankruptcy, you’re allowed to keep (exempt) assets that you’ll need for your fresh start. Although what you can keep will depend on the laws of your state, it’s likely that your exempt property will include household goods, clothing, a car, retirement funds, and a portion of equity in your home.

Some property might not be exempt, however. In a Chapter 7 case, your nonexempt property can be seized by the court and sold to pay creditors. But, that same property could be saved if you file a Chapter 13 repayment plan. Instead of surrendering the property to the court, you’ll pay its value in installments over three to five years. Your creditors will still get the value, but you’ll be able to keep the property.

Catch Up Past Due Mortgage Payments

If you’re behind on your house payments, you can protect your home in a Chapter 13 case by proposing a repayment plan that will pay those arrearages over three to five years. During the case, as long as you’re making your regular mortgage payments on time (along with any tax or insurance payments that come due) and your Chapter 13 plan payments, and not otherwise defaulting on your loan, the bankruptcy court will not allow the creditor to foreclose.

Get Back a Repossessed Vehicle

You can also use a Chapter 13 case to get back a vehicle that’s been repossessed. You’ll have to work fast because once the lender sells the car, you won’t be able to retrieve it. But usually, as long as the vehicle is still in the hands of the creditor, you’ll be able to get it back and work out a plan to pay what you owe.

When You Need to Protect a Cosigner

When defaulting on debt, most people understand that the creditor will look to a cosigner (another person obligated to pay the loan) to pay the balance. In most cases, if you file a Chapter 13 bankruptcy case and propose a repayment plan that the bankruptcy court will approve, your creditors won’t be allowed to seek payment from a codebtor as long as you’re in the Chapter 13 case. It doesn’t entirely absolve the codebtor, however. The codebtor will be responsible for paying any outstanding balance after your case concludes.

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