Should I declare bankruptcy?
Let me tell you about a common scenario I encounter. It’s toward the end of a bankruptcy consultation and I’ve given my speech on the ins and outs of the bankruptcy process, the difference between chapter 7 and chapter 13 filings, and what not. I ask my potential client if he has any more questions, to which he replies “well, do you think I should file for bankruptcy?”
Let me say up front that I just can’t answer this question. I will do my best to provide you with all the bankruptcy knowledge you need, but in the end, this is a decision you have to make on your own. Don’t get me wrong, if you’ll let me, I’ll talk the hell out of you, weighing your options and advising you as best I can. But in the end, ultimately, it is your decision.
With that said, I have compiled some general points to think about when trying to decide whether or not to file for bankruptcy.
Have you already tried trading? Many times, creditors are willing to work with you by agreeing to payment plans or perhaps lowering interest rates. You say you tried once and were denied? Call back and talk to someone new. I’ve found that when negotiating with creditors, it often takes persistence to accomplish almost anything. However, most of the time creditors are willing to work with you, especially when the account is past due. At the end of the day, they just want to get paid something.
How do your liabilities compare to your assets? It is especially important when filing for Chapter 7 bankruptcy that you have an idea of the value of your non-exempt assets, as well as your total liabilities. Remember that under chapter 7 bankruptcy protection, a trustee will liquidate your non-exempt assets to partially satisfy your creditors. In general, bankruptcy will make more sense when your debts exceed the value of these assets.
What is the nature of your debts? Remember that filing for bankruptcy is not a cure-all and certain categories of debt are not discharged. The most common non-dischargeable debts I see are student loans, alimony, and child support. There are others, so be sure to discuss this with your bankruptcy attorney.
What is the nature of your assets? When you file Chapter 7 bankruptcy, your assets will be classified as
either exempt and not available to the trustee, or non-exempt and included as part of the bankruptcy estate. How do these two categories compare in your specific case?
Will you lose your house or your car? Remember that you are only allowed a maximum amount of exempt capital on various assets, including your home and car. If your current equity exceeds this number, your asset may be sold to partially pay your creditors.
Is your wages currently being garnished? Bankruptcy may be indicated if certain creditors have already received judgments against you and, as a result, your wages are now being garnished. Many times, filing for bankruptcy can suspend wage garnishment and provide immediate relief in such cases.
Have you been sued? Even if you do not currently have a judgment against you, bankruptcy may be suggested in situations where you can avoid a future judgment (see wage garnishment above).
How are your savings distributed? The money in the checking/savings account is available to the trustee, to prevent it from going into the bankruptcy estate, you must spend it below the allowable exemption amount. However, money distributed between IRAs and 401(k)s is often protected.
Do you have co-signers on any of your debts? Although filing for bankruptcy will eliminate your liability upon discharge of the debt, co-signers may still be liable. This may influence your decision to apply, as your friends or family would be carrying your debt.
How will you be affected by a negative credit score? Filing for bankruptcy can negatively impact your credit score. However, the decrease in the number is usually smaller than expected. This is especially true if you already have one or more delinquent accounts, which have been reported to the credit bureaus. Still, in today’s hostile credit environment, you can expect more than a multi-year period where you’ll have difficulty getting loans.
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 debts and superfluous expenses. How much is left each month? Is it enough to pay off your debts at current interest rates? What about lower interest rates?
How old are you? How long do you have to rebuild your savings before you retire? It’s not a hard and fast rule by any means, but age can sometimes correlate with the need to file for bankruptcy.
How many dependents do you have? I often say that clients without dependents can lower their monthly expenses and pay off their debts more easily than those with dependents. On the other hand, the average income level for chapter 7 bankruptcy is based on household size and, therefore, could determine your bankruptcy eligibility.
Again, these are not rules set in stone. Instead, they are simply points to consider. As always, I recommend that you speak with a licensed bankruptcy attorney and thoroughly discuss all of your options before making a decision. If you have any questions, feel free to call me or visit my website and take advantage of our online live chat feature.