by: Baran Bulkat, Attorney
Filing for bankruptcy relief is an important financial decision. Whether bankruptcy is right for you depends on your individual circumstances. But some of the most important factors to consider before filing for bankruptcy include:
Before filing for bankruptcy, consider what types of debt you are trying to eliminate and whether you can realistically deal with these debts outside of bankruptcy. If you are struggling with credit card debt, determine whether you can afford to pay it off. If you have enough income to pay back your credit cards, you may be able to consolidate them into a single loan or settle your debt with the credit card company. (To learn more, see Options for Dealing With Credit Card Debt.)
If you are behind on other types of debt such as your mortgage or taxes, you may be able to obtain a mortgage loan modification or work out a payment plan with the Internal Revenue Service (IRS). If you can’t afford to pay back your debts and your creditors are not willing to work with you, bankruptcy may be the right choice for you. But also keep in mind that certain debts are not dischargeable in bankruptcy.
If you default on your loans or credit cards, your creditors can sue you to collect their debts. If you don’t oppose the lawsuit, the creditor will typically obtain a default judgment against you. Depending on your income and the amount of assets you own, it can then begin garnishing your wages or placing liens against your property to enforce the judgment and collect the debt.
If you are being sued by creditors, bankruptcy will stop or delay the lawsuit by placing an automatic stay on almost all collection actions. If the debt is discharged in bankruptcy, the pending lawsuit will be dismissed.
One of the most common reasons people seek bankruptcy relief is to save their home or car from getting foreclosed on or repossessed. If you fall behind on your mortgage or car loan payments, your lender has the right to take the house or vehicle back. This is why these obligations are called secured debts.
In most cases, a bankruptcy discharge does not eliminate a secured lender’s lien on the property. However, a Chapter 13 bankruptcy can stop or delay the foreclosure or repossession and allow you to get caught up on your payments. In addition, if certain conditions are met, you may be able to reduce your loan balance with a cramdown or get rid of your second mortgage or other wholly unsecured lien through lien stripping in a Chapter 13.
An important factor to consider before filing for bankruptcy is the amount of property you own. If you wish to file for Chapter 7 bankruptcy, be aware that the bankruptcy trustee has the power to sell your nonexempt assets to pay back your debts. Also, even though you can keep all of your property in Chapter 13 bankruptcy, you would have to pay your general unsecured creditors the value of your nonexempt assets through your repayment plan.
This means that the amount of property you own should be taken into account whether you are considering a Chapter 7 or Chapter 13 bankruptcy. Exemptions help you keep a certain amount of property in bankruptcy. But each state has a different exemption system. As a result, check your state’s exemption laws to make sure you can protect all of your property before you file your case.
For more information on your property in bankruptcy, see Bankruptcy Exemptions.