Should I File Bankruptcy?
LegalMatch Law Library Managing Editor, Ken LaMance, Attorney at Law
Filing for bankruptcy can be a workable option for individuals who need relief from their financial debt. Bankruptcy is a court process that allows an individual to have a fresh financial start. It can relieve much of the stress associated with debts that have accumulated from credit cards, mortgages, car loans, and other types of creditor-debtor arrangements.
Filing for bankruptcy is a major decision that can have long-lasting consequences. You should consider all your options before deciding to file bankruptcy.
What Types of Bankruptcy are there?
Unless you will be filing bankruptcy as a business, you will likely be filing under consumer bankruptcy laws. There are two basic types of consumer bankruptcy: Chapter 7 and Chapter 13 bankruptcy. Chapter 7 bankruptcy is known as “Liquidation Bankruptcy”, while Chapter 13 is known as “Repayment Plan Bankruptcy”.
The main feature of Chapter 7 is that the court may allow some or even all of your debts to be “discharged” or forgiven. This means that you will not be required to pay off the debts. Some debts are non-dischargeable and must be repaid, such as student loans, taxes, and money owed to the government.
Some of your property might be sold in order to pay off some of the debt during a Chapter 7 bankruptcy proceeding. However, you might be able to keep some of your assets and property. Property identified as “exempt” may not be repossessed by creditors for the purpose of paying off the debt. Chapter 7 is ideal for persons who do not have a steady income stream, and own a lot of exempt property.
The main feature of Chapter 13 bankruptcy is that the court allows the debtor to reorganize their debts to be paid slowly over a longer period of time. Instead of discharging the debt, the person is given more time to pay back their debt. Repayment plan bankruptcy is ideal for persons who have a steady income stream, are good at sticking with payment plans, and have a lot of non-exempt property.
In both Chapter 7 and 13 bankruptcy types, the court will issue an “automatic stay” on collections. This means that debtors are prohibited from collecting on debts while the bankruptcy process is still ongoing. Also, the court will usually appoint a trustee who acts as a mediator between the debtor and the creditor(s).
What are the Pros and Cons of Filing Bankruptcy?
You should carefully weigh both the positive and negative aspects of filing for bankruptcy. Some of the pros and cons of filing bankruptcy are:
Pros:
- Fresh start: Filing for bankruptcy allows for the person to have a fresh start and catch up on back expenses (especially in Chapter 7 proceedings). A new repayment plan can also be a welcome change.
- Stop collections: The “Automatic Stay” on collections is effective as soon as you file. You can hold a creditor liable if they attempt to make additional collections after you have filed for bankruptcy
- You can keep some of your assets: Some assets may be exempt from repossession, such as a home and car and others related to basic necessity
- Low filing thresholds: Usually there is a low threshold or minimal amount required for filing for bankruptcy.
- You cannot be fired simply for filing bankruptcy
Cons
- Affect on credit history: Filing for bankruptcy will be reflected on your on credit history for up to 10 years (although your credit might already be affected if you are currently contemplating bankruptcy)
- You may lose some or all your assets, especially credit cards and credit lines
- Waiting periods in between filing: Once you file for bankruptcy, you may have to wait for up to six years before you can file again
- Even though you have filed for Chapter 7, a judge has the authority to convert it into Chapter 13 claim
- Many debts are non-dischargeable
- Public knowledge: Bankruptcy proceedings are documented in public court records and are sometimes published in newspapers
What are the alternatives to filing bankruptcy?
Before you file for bankruptcy, you may wish to consider alternative options:
- Negotiate with your creditors to adjust your monthly payment amounts
- Work with an outside advising source such as a debt reduction company or consumer credit counseling service. They can prescribe different routes of action
- Reassess your finances and cut back on spending. You might discover unwise spending habits that have interfered with your ability to make payments
However, if you simply don’t have the financial resources, bankruptcy may be your last available option. You may wish to consult with a lawyer to help you with your decision.
Do I need a Lawyer for Filing Bankruptcy?
Filing bankruptcy can be a major project. It involves a complete assessment of your financial capabilities as well as a projection of your future expenses. You should consider hiring a finance attorney or a business lawyer if you think that filing bankruptcy might be necessary. They are familiar with all the details of bankruptcy law and can tell what type of bankruptcy might be appropriate for you.
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Last Modified: 10-13-2010 11:29 AM PDT
