Let me tell you about a common scenario I encounter. It is towards the end of a bankruptcy consultation and I have given my speech regarding 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 they have any further questions, to which they reply "well, do you think I should file bankruptcy?"
Let me say upfront that I simply cannot answer this question. I will do my best to supply you will all of the bankruptcy knowledge you need, but in the end this is a decision you must make on your own. Don't get me wrong, if you let me I will talk until blue in the face, weighing your options and advising you to the best of my ability. But in the end, it is ultimately your call.
With that said, I have compiled some general points to think about when you are trying to decide whether or not you should file for bankruptcy protection.
Have you already tried to negotiate? Often times, creditors are willing to work with you by compromising on payment plans or perhaps lowering interest rates. You say you tried once, and were denied? Call again and speak with someone new. I have found that, when negotiating with creditors, it is often takes persistence to accomplish much of anything. However more often than not creditors are willing to work with you, especially when the account is in arrears. 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 chapter 7 bankruptcy that you get 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 in partial fulfillment to your creditors. In general, bankruptcy will make the most sense when your debts outweigh the value of these assets.
What is the nature of your debts? Remember that filing bankruptcy is not a cure all, and that certain categories of debts 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 address this point with your bankruptcy attorney.
What is the nature of your assets? When filing chapter 7 bankruptcy, your assets will be categorized as
either exempt, and unavailable 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 car? Remember that you are only permitted a maximum amount of exempt equity in various assets including your house and car. If your present equity exceeds this number, your asset may be sold to partially repay your creditors.
Are your wages currently being garnished? Bankruptcy might be indicated if certain creditors have already received judgments against you and, as a result, your wages are now being garnished. Often times, filing bankruptcy can suspend wage garnishment and provide immediate relief in such cases.
Have you been sued? Even if you don't currently have a judgment against you, bankruptcy may be suggested in situations where it can prevent a future judgment (see above wage garnishment).
How is your savings distributed? Money present in savings/checking account is available to the trustee, in order to prevent its entry into the bankruptcy estate you must spend it down below the allowable exemption amount. However, money distributed among IRAs and 401(k)s is often protected.
Do you have co-signers on any of your debts? While filing bankruptcy will remove your liability upon debt discharge, you co-signers may remain liable. This may influence your decision to file, as your friends or family members would then be burdened with your debt.
How will you be affected by a negative credit score? Filing bankruptcy can negatively influence your credit score. However, the decrease in number is often less than expected. This is especially true if you already have one or more accounts in arrears, which have been reported to the credit bureaus. Even so, in today's hostile lending environment you can expect upwards of a several year period in which you have difficulty securing loans.
Do you have extra money every month? I always tell my clients that, if they haven't already, they should create a monthly budget. Include all necessary expenses, but omit your debts and superfluous expenses. How much is left every month? Is it enough to pay off your debts at the current interest rates? What about at lower interest rates?
How old are you? How long do you have to rebuild your savings prior to retirement? It is no hard and fast rule by any means, but age can sometimes correlate with the need to file bankruptcy.
How many dependents do you have? I often kind that clients with no dependents can reduce their monthly expenses and pay dot their debts more easily than those with dependents. Then again, the median income level for chapter 7 bankruptcy is based on household size and thus could determine your eligibility for bankruptcy.
Again, theses are not rules set in stone. Instead, they are simply points to consider. As always, I recommend you speak with a licensed bankruptcy attorney and thoroughly discuss all options prior to making a decision. If you have any questions, feel free to give me a call or visit my website and take advantage of our live online chat feature.
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