What to Consider Before Filing for Bankruptcy
Nothing can quite do a number on us emotionally and mentally like serious financial problems. Feeling like our debt is out of control, and we can’t get on top of it, is a major wake up call to start evaluating the situation and our options. Bankruptcy is one such route, and here are some important things to take into account.
Assessing the Damage
This part may be a bit uncomfortable because you have to come face-to-face with the extent of your financial mess. Have you been only able to make minimum payments on credit cards? Do you have creditors calling you for past due payments? Do you feel fear or anxiety when you think about tackling your financial issues? Have you thought about consolidating your debt to make repayment easier? Does the amount of money you owe exceed your assets? Are you facing lawsuits for unpaid debts? Are your wages currently being garnished, or are they in danger of becoming so? Are you out a job with no good prospects for the foreseeable future?
If you answered yes to at least a few of these questions, then bankruptcy may be a good option, but it is still not a decision to be made lightly. The filing will stay on your credit report for 10 years, and your credit can take quite the hit. It may be very difficult to secure various types of loans for at least a few years afterwards, depending on how well you build back up your credit afterwards.
Types of Bankruptcy
If you have decided bankruptcy may be a viable option, you must educate yourself on the two types available to you. First is chapter 7 bankruptcy, which allows you to completely discharge all eligible debts, such as credit cards and medical bills. Assets will be liquidated to pay down some of the debts, provided you have any, with many types of property being exempt, such as the equity in your home. To qualify, you must either make less than the median income for your family size in your state, or if you make more than this, show that you have insufficient disposable income to pay down your debt, after taking into account allowed expenses.
Check out The Means Test & Other Chapter 7 Eligibility Issues for more information on qualifying.
Then, there is chapter 13 bankruptcy, which involves a payment plan of three to five years to pay down at least a portion of your debts—at the end of this time, any remaining debt eligible for discharge is wiped out. If you don’t qualify for chapter 7, this would be your next option, provided you met certain requirements. Or, if you have certain types of property you would not want liquidated with a chapter 7 filing, you would consider this option.
This of course, is a brief overview of the types of bankruptcy available to individuals—you would want to read more about each in depth before proceeding.
Eligible and Non Eligible Debts
Before proceeding, it is important you know that not all debts are eligible for discharge, so depending on your financial obligations, bankruptcy may do little to help your cause. Examples of non-dischargeable debts include tax obligations within a certain time frame, student loans (unless you can prove extreme hardship in having to repay them, which is very rare), judgments resulting from drunk driving accidents or civil cases involving fraud, alimony, child support, criminal fines, certain debts to government agencies and attorney fees from child support or custody cases.
If you have decided you want to file bankruptcy, it is advisable to consult an attorney, even if you have a relatively straightforward case. While you can do it on your own, it is usually not a good idea. Once you have filed, creditors are notified, and they can no longer contact you. Your attorney can give you more information on the proceedings and what to expect.
Bankruptcy can be a great way to get a fresh financial start. But, you should not go into this lightly. Carefully consider your situation, and whether there are other alternatives.