Is Bankruptcy Right For You? Should You File?

Here are some factors to consider if you are thinking about filing for bankruptcy.

Filing for bankruptcy relief is a significant financial decision and whether bankruptcy is right for you depends on your circumstances. Some important factors to consider before filing for bankruptcy include:

  • whether you can pay back your debts outside of bankruptcy
  • whether creditors are suing you to collect their debts
  • whether you are facing foreclosure or repossession of your property, and
  • whether you would lose property in bankruptcy.

Start by learning the benefits and differences of Chapter 7 and Chapter 13.

Can You Deal With Your Debts Outside of Bankruptcy?

No one wants to file for bankruptcy. If you’re considering it, you’ve likely spent a lot of time exploring ways to pay off your debt, including:

  • consolidating credit card debt into a single, lower-interest loan or through a credit consolidation company
  • applying for a loan modification, or
  • working out a repayment plan with the Internal Revenue Service (IRS).

But the question isn’t just a matter of whether you can repay your debts. You’ll want to consider how long it will take you to get into a secure financial position.

For instance, while bankruptcy will stay on your credit report for up to ten years, filing for Chapter 7 can improve a credit score faster than other approaches. And unlike a loan modification, you can catch up on a late mortgage using Chapter 13 without the cooperation of your lender. Also, while you can’t discharge all debts in bankruptcy, you can repay them in Chapter 13 without worrying about creditor collection actions.

Find out about life after Chapter 7 and life after Chapter 13.

Are Creditors Suing You?

If you default on a personal loan or credit card, a creditor can sue you to collect the debt. If you don’t oppose the lawsuit, the creditor will typically obtain a default judgment against you. Depending on your income and assets, it can then begin garnishing your wages or placing liens against your property to enforce the judgment and collect the debt.

If a creditor is suing you, you’re probably behind on other accounts, too. Filing for bankruptcy will stop many types of lawsuits. The automatic stay also stops other collection actions, and all of your qualifying debts will be discharged.

Find out about credit card lawsuits and bankruptcy.

Are You Facing Foreclosure or Repossession?

A common reason to seek Chapter 13 bankruptcy relief is to save a 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 back the house or vehicle.

Unlike Chapter 7, a Chapter 13 bankruptcy has a mechanism that can allow you to get caught up on your payments. (Chapter 7 will provide temporary relief only.) Also, you might be able to reduce your loan balance with a cramdown or get rid of your second mortgage through lien stripping in Chapter 13.

Do You Own Nonexempt Property?

An essential factor to consider before filing for bankruptcy is the amount of property you own. Everyone can protect, or “exempt,” a certain amount of assets in bankruptcy. However, you might have to let go or pay for nonexempt property you’d like to keep. Here’s how it works.

If you file for Chapter 7 bankruptcy, the bankruptcy trustee will sell your nonexempt assets to pay back your debts. In Chapter 13, you can keep all of your property. However, you must pay the value of any nonexempt assets through your repayment plan.

Keep in mind that each state has a different exemption system. Check your state’s exemption laws to make sure you can protect important property before filing your case. For more information on your property in bankruptcy, see Bankruptcy Exemptions.

Find More Information

While these issues are commonly involved in a bankruptcy case, many others exist. To determine what’s best for you, seek advice from a knowledgeable bankruptcy attorney.

Also, you might find it helpful to learn when a debtor might want to file for bankruptcy right away, and factors that might suggest it would be better to delay filing for bankruptcy.

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