Should you file? A few things to think about when deciding whether to file for bankruptcy. A quick look at some things to consider.
There are many things to consider when deciding whether to file for bankruptcy.
First, you should consider what your alternatives to filing are. This could include doing nothing at all, negotiating a payment plan with your creditors, or selling property.
If you do decide to file, like most things, there are both upsides and downsides.
Bankruptcy can help by offering immediate relief, preventing harassment or wage garnishment from creditors, and generally giving you a fresh financial start.
On the other hand, you could potentially lose expensive property and not all debts are eligible to be erased.
As you move through the process, it’s important to know how a Chapter 7 can potentially impact your specific situation. This article will help you think through whether or not a bankruptcy filing is right for you.
This applies to a certain category of individuals who are deemed “judgment proof.”
If you are judgment proof it means that it has been determined that you do not have the means, in income or assets, to pay back your debts or satisfy the judgments against you.
In this case, you probably do not need to file for bankruptcy because you are not under any obligations to repay the debts you owe.
Negotiate With Creditors
There are some instances where you can attempt to negotiate with your creditors to pay back some of the debt you owe instead of all of it. This is often referred to as “debt settlement.” It is important to note that the debt settlement will appear on your credit score and can likely lower your credit score.
Third Party Repayment Most people in a significant amount of debt owe money to multiple people. In these cases, some people choose to take out one loan to cover the total amount that they owe to creditors so that they only have to focus on one payment. This is often called “debt consolidation.” It's a tool used to optimize your finances, and it might be the right path for you.
Sell Your Property If you have an expensive asset like a house or a car, you have the option to sell it to pay off, or significantly reduce, your debts.
Erase Most Debts
Chapter 7 bankruptcy erases, or “discharges,” most kinds of debts such as credit card debt, medical bills, personal loans, civil judgments (except for fraud), past-due rent, past-due utility bills, business debts, and some older tax debts. A few debts can’t be erased such as student loan debt and certain tax obligations.
Stop Wage Garnishment
Bankruptcy prevents creditors from garnishing your wages. In doing so, it can actually improve your income because you actually get to keep the money you earn at work. In the case of wage garnishment, this is the one exception to the fact that there is no reason your employer would be informed of your bankruptcy case.
Stop Debt Collection Calls
As soon as you file for bankruptcy a hold called an “automatic stay” is put in place. This means that debt collectors cannot contact you to collect the debts. If they do, the court can penalize them.
Recover Your Suspended Driver’s License
Filing for Chapter 7 can help you recover your driver’s license if 1) it has been suspended due to failure to pay parking or driving tickets, or 2) if it was suspended for driving without insurance.
Prevent a Water, Gas, or Electricity Shut Off
Bankruptcy stalls attempts to cut off your utilities.
Stop a mortgage foreclosure, tax sale of your home, or eviction from an apartment
Filing for bankruptcy places a hold, or an “automatic stay,” on all collection attempts being made by your creditors including bank lenders and landlords. This includes foreclosures. This hold goes into effect immediately upon filing for bankruptcy.
Prevent a car from repossession
The same as above, the automatic stay generally prevents creditors from repossessing your car when you file for bankruptcy. However, in special cases, the car can be repossessed if the lender get court permission first.
Improved Access to Credit and Banking
Although it is true that filing for bankruptcy can temporarily limit your access to unsecure credit, many people actually rebuild their credit after bankruptcy using secure credit cards. They also become more attractive to lenders because they no longer have a lot of other debt or creditors that they owe. Rebuilding your credit after bankruptcy can be a great way to re-enter into the banking system.
Your May Lose Expensive Property.
As mentioned above, expensive property could get taken away during bankruptcy. Although day-to-day property is generally protected, valuable assets or items might be repossessed or sold in order to satisfy your debts.
You Lose Your Ability to File for 8 Years.
Once you file for bankruptcy, you are not allowed file Chapter 7 again for 8 years. That means that determining when to file for bankruptcy is almost as important as deciding to file in the first place.
Filing too late can subject you to unnecessary harassment by your creditors. Filing too early can expose you to still having to pay substantial debts if they come in after you file.
Your Cosigners Will Be Stuck with Your Debt.
If you have a debt that you owe with someone else, it is important to note that they will still be responsible for the debt if you are unable to pay even after you file for bankruptcy.
The World Will Know About Your Financial Affairs. Bankruptcy will appear on your credit report for up to 10 years. In some cases, the both the bankruptcy filing and the erased debt remains.
It’s important to keep in mind that your bankruptcy will be disclosed on your credit report when you apply for certain things.
There are three groups of people:
Those are people who should file for Chapter 7 bankruptcy right now;
Those who should wait a little bit of time and then file for Chapter 7 bankruptcy; and,
Those who should not file for Chapter 7 bankruptcy.
Who Should File
You have over $10,000 in debt that you’re unable to pay back. This includes family loans, judgments against you, credit card debt, and medical debt.
You have less than a 600 credit score. Your credit report will also list each creditor you owe. This is helpful if you don't remember the creditors you owe.
You do not own expensive property that the court would take away.
Most people who file for Chapter 7 bankruptcy have less than $15,000 of property and get to keep it. Chapter 7 has exemptions for most day-to-day property. However, it’s important to know that if you own a valuable item like a car or house, it could be taken.
Who Should Not File
You have less than $10,000 in debt. You can only file for Chapter 7 bankruptcy once every 8 years. Because of this, it is important to file when your debt it at it is worst. If you only have $10,000 in debt, you should try to pay those debts back first or wait to file until you have more debt.
You want to erase your student loan debts. Student loans cannot be erased with Chapter 7. If these loans make up the majority of your debts, you will likely still be on the hook even if you file for Chapter 7. Only in situations where you can show that your student loans cause undue hardship are your loans eligible to be erased.
You want to erase money that you owe for taxes you haven’t paid. You can only erase tax debts in Chapter 7 that are older than 3 years.
You want to erase debts you owe from illegal behavior. You can’t erase debts from judgments against you for things like driving drunk or other types of criminal offenses. If you have a judgment like this, it’s important to check on whether that specific judgment is eligible to be erased.
You want to erase debt you owe for child support or alimony that you haven’t paid. Although you can erase other types of debt connected to divorce or separation proceedings, you cannot erase child support or alimony obligations with Chapter 7.
You successfully filed for bankruptcy in the last 8 years. You can only erase your debt in a Chapter 7 case once every 8 years.
You earn above the median income for your state. Chapter 7 can only be used if you make less than the median income in your state. If you earn more than the median income, you may be ineligible to file Chapter 7 and may be required to file for Chapter 13. Although, Chapter 13 has downsides of its own.
You have expensive property. As mentioned above, although most day-to-day property is protected under the Chapter 7 property exemptions, expensive property is vulnerable to seizure. This means that the court may take your house or car if it has value in order to sell it and give the money to the people you owe.
Who Should Wait to File
You’ve made a large purchase you made in the last 6 months. The courts want to ensure that people are filing for bankruptcy because they need relief, not simply because they don’t want to be responsible for their bills. If you’ve made a large purchase within the last 6 months, it is possible that the court will become suspicious and think you are filing for the wrong reasons.
You transferred expensive property to a friend or family member in the last year. If you transferred expensive property to a family or friend in the last year, the court may try to recover that property and use it to pay off some of your debts.
You owe your landlord money. You owe your current landlord a lot of money and you want to stay in your current apartment or house. If you file for bankruptcy to erase your back rent, your landlord may try and evict you. You should probably try to pay back your landlord before you file for bankruptcy, so that you can stay in your apartment.
You think you may fall into more debt in the next few months or years. It’s only a good idea to file for Chapter 7 bankruptcy if you think that you’re going to be in a better financial situation after your bankruptcy.
If you think that you’re at risk of having your financial situation get worse after you file, you should wait. You file for bankruptcy when you’re in the most debt that you expect to be in. That way you can get lasting relief and avoid having to go through the process again.
You are suing someone or plan to sue someone. If you win your lawsuit, the court may take this money away from you and give it to the people you owe. So you should wait to file for bankruptcy after your case has been settled or dismissed.
You have other debt relief options. Given the cons of bankruptcy, if there are other debt relief options available to you, make sure to fully consider them. For example, if you are a veteran, the federal government has information online about veteran debt relief.
Chapter 7 bankruptcy is a powerful tool to help move you toward a stronger financial future.
When deciding whether or not to file for bankruptcy, it is important to consider what alternatives are available to you and if those will serve you better.
If you think bankruptcy might be the right option for you, it is important to understand how it can benefit and impact your particular situation and whether or not the timing is right for you to file.
Whether you’re filing with an attorney, legal aid, online software, or on your own with a service like Upsolve, Chapter 7 bankruptcy can be a great way to help you get a fresh start. We love what we do, and we want to help you and your family become debt-free.
Upsolve is a nonprofit that helps low-income Americans file for bankruptcy for free. See if you qualify for our help!
Upsolve is a 501(c)(3) legal aid nonprofit that started in 2016. Our mission is to help low-income Americans in financial distress get a fresh start through Chapter 7 bankruptcy at no cost. We do this by combining the power of technology with pro bono attorneys. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have mission-driven funders that include the U.S. government, former Google CEO Eric Schmidt, and private charities.