How to tell whether filing bankruptcy now will actually improve your situation

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Written by Andrea Wimmer, Esq..  
Updated June 3, 2020

Summary

Filing bankruptcy allows you to eliminate your debts - credit cards, car loans, bank loans, medical bills etc. While eliminating these payments will inevitably help your household budget, it won’t change the here and now. You’ll still be responsible for rent, utilities, insurance, groceries and really all other living expenses. Remember, filing bankruptcy does not change your income. If you made $0/mo. before filing your case, you’ll still be making $0/mo. afterwards.

Filing bankruptcy allows you to eliminate your debts - credit cards, car loans, bank loans, medical bills etc. While eliminating these payments will inevitably help your household budget, it won’t change the here and now. 

You’ll still be responsible for rent, utilities, insurance, groceries and really all other living expenses. Remember, filing bankruptcy does not change your income. If you made $0/mo. before filing your case, you’ll still be making $0/mo. afterwards. This means that simply stopping paying your unsecured debt so you can make sure your necessities are taken care of will have the same short-term effect as a bankruptcy filing. 

Let's take a look at an example: 

Debbie, a single woman working in the hospitality industry was doing alright, taking home a net income of $2,500/month. She wasn’t putting much into savings on a monthly basis, but her income was enough to pay her bills and living expenses, including the $600/mo. in credit card payments. Last week, Debbie was laid off. Her employer, a small catering and event planning company, had lost pretty much all of its business and was forced to shut down. No one really knows whether they’ll be able to open their doors again once this all blows over. 

Debbie was able to apply for and start receiving unemployment income of $240 per week or $1,040 per month. Her monthly budget changed as follows:

Figure 1. Debbie's Budget Before and After she lost her income
Figure 1. Debbie's Budget Before and After

Debbie knows she can’t make her credit card payments anymore - she is barely able to figure out a new budget that allows her to keep up with rent, utilities and food. She is considering filing Chapter 7 bankruptcy to help deal with this shortfall. 

Option 1: Debbie holds off on filing bankruptcy for now, but stops all credit card payments. 

Option 2: Debbie decides to file for Chapter 7 bankruptcy and, as a result, stops all credit card payments. 

Regardless of which option Debbie chooses, her new monthly budget will look like this: 

Figure 2. Effect on Debbie's Budget under Option 1 and Option 2.
Figure 2. Effect on Debbie's Budget under Option 1 and Option 2.

Her monthly expenses exceed her income by $860/mo. Filing Chapter 7 bankruptcy will not increase her income. It will not help her deal with the $860/mo. shortfall. In fact, it won’t change her current situation at all. Since filing a Chapter 7 will provide Debbie neither immediate relief from financial distress nor a fresh start, it’s probably premature for Debbie to file Chapter 7 bankruptcy now.

About the author

Andrea Wimmer, Esq.

Andrea practiced exclusively as debtors’ counsel in consumer chapter 7 and 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team full time in August 2019. While in private practice, Andrea handled all ban... read more

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Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

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