Often when people ask, “Should I file bankruptcy?” most people will respond, “Only as a last report!” But the real answer is that it depends on your circumstances.
Bankruptcy does have its negative effects. But it can also help you get your finances in order relatively quickly, especially with Chapter 7.
When to Consider Filing Bankruptcy
Social stigma regarding bankruptcy is minor these days, though some still see it as almost a moral failure.
But let’s be fair: There’s nothing wrong with filing for bankruptcy. Many people file bankruptcy because of outrageously high medical bills and/or job loss. Few people compile debt intending to go bankrupt. Sometimes, though, things like the above get out of hand and burn through your family’s savings and belongings like a wildfire. Other common reasons for filing bankruptcy can include:
- Business failures
- Home foreclosure
- Lawsuits from creditors
- Over-reliance on credit cards
- Using credit cards to pay off each other
- The exhaustion of retirement accounts trying to pay bills
Bankruptcy can provide breathing room before allowing any of the stressors above to overwhelm you.
What to Consider Before Filing Bankruptcy
Alternatives to bankruptcy exist, but most are useful only when you already have money left to take advantage of them. Free credit counseling may help in some cases if you can implement a debt management program. You may be able to get a debt consolidation loan or debt settlement. Very strict budgeting may help. You may also be able to take a second job to cover your expenses, though physical exhaustion may hamper your recovery efforts.
Selling off assets helps, too. But when all the extra assets are gone and you have no other choice, bankruptcy becomes an attractive option. It isn’t free, as you’ll have to pay a bankruptcy lawyer. But once it’s done, your unsecured debts will be gone. You’ll still have to pay secured debts, as well as child support, alimony, most taxes, personal injury payments, and government fines.
Do I Qualify for Bankruptcy?
Unless you’re a professional farmer or fisherman, you have two options for bankruptcy: Chapter 7, which clears unsecured debts without payments, and Chapter 13, where the court arranges a monthly payment for 3-5 years to pay off all your creditors.
Which you choose depends on your amount of secured debt, your income, and how much property you’d like to keep. You’ll have to pass a means test for each, which also determines which you can choose. This test is based on how much money you make per month, as opposed to how much you owe, and the amounts for each vary by state and household size.
Which Debts Can I Discharge Through Bankruptcy?
In Chapter 7, you can discharge the following debts:
- credit card debt
- medical bills
- lawsuit judgments
- personal loans
- lease/contract obligations.
Chapter 13 allows you to discharge these debts, as well as debts from:
- divorce (except spousal or child support)
- retirement plan loans
Debts that you can’t discharge include:
- student loans
- spousal or child support
- income taxes
- personal injury debts
- debts owed to government agencies
Bankruptcy Can Help Save Your Home
The purpose of bankruptcy is to give you a fresh start. That’s why homes are exempt from creditors’ claims (if you can make the payments). It’s much easier to start fresh if you still have your home. If you are facing foreclosure, bankruptcy may be able to help you save your home through the automatic stay. To learn more about foreclosure defense, contact a bankruptcy attorney.
Keep in Mind the Potential Impact of Bankruptcy
Of course, there are potential negatives to filing bankruptcy. Bankruptcy can impact your private life, credit score, and cosigners. Sadly, any cosigners won’t get the benefit of your bankruptcy. In fact, your creditors will probably go after them for payment. This will undoubtedly strain your relationships with them, and they may never be willing to help you again.
Meanwhile, your bankruptcy filing will become public record and will be published as such (this is how celebrities get found out so quickly). You’ll have to meet with creditors in a public forum, and it all goes onto your credit report, where it will stay for 7-10 years.
After bankruptcy, your credit score may drop, and it will take diligent effort to bring it back. The presence of the bankruptcy will also deter lenders from providing large loans, though you should be able to get smaller loans to help stabilize and rebuild your credit. However, a bankruptcy attorney can help you take steps to rebuild your credit after filing bankruptcy.
Should I File Bankruptcy? Ask a Minnesota Bankruptcy Expert
Gregory A. Wald, Attorney at Law, specializes in bankruptcy cases. We can answer your questions and help you make an informed decision that best suits your situation.