Sometimes bankruptcy is a good decision. Sometimes it is not going to help you at all. Most of the time when a person thinks of bankruptcy they think of a Chapter 7 bankruptcy. This is, in a nutshell, when a trustee will essentially take a person’s assets (if any) and use the proceeds (if any) to pay off the creditors. Afterward, the debts are wiped out. Is a Chapter 7 bankruptcy right for your situation? It really comes down to this one simple issue: will it make your life better? At the end of the day, Chapter 7 bankruptcy is just another vehicle to get you from point A to point B. If you are wondering whether Chapter 7 bankruptcy is the best vehicle for you then there are 5 things you will want to know.
1. Can it get you where you need to go?
Would bankruptcy help you with the type of debt you are struggling with? Not all debt is the same. Aside from just the name of the company you are borrowing from, the interest rate, or the reason you take on the debt, it is important to know what type of debt you have. Even though the average Joe probably doesn’t really care much about a lot of the specifics of a debt, things in bankruptcy are a little different. The type of debt you have can be the difference of whether it will be discharged in Chapter 7 or not. Chapter 7 bankruptcy is a very useful tool to help get rid of many types of debt like credit cards, medical bills, and payday loans. But it will not be much help getting rid of debt for child support, student loans, most tax debt, criminal fines, or “secured” debt (i.e. debt secured by your car or home). If you are drowning in credit card debt or medical bills, then this might help you out. If your mortgage or student loan debt is killing you but you have virtually no other debts, Chapter 7 probably won’t help much – and there’s not much point in buying a car if you need to get across the ocean. For debts like taxes, cars, or past-due mortgage payments you might be better off looking into Chapter 13, or even trying to negotiate directly with the creditor. Before you consider Chapter 7 bankruptcy it is important to figure out what types of debts you have so that you will have an idea whether it can potentially get you where you need to go.
2. Can it get you there safely?
Would you be able to protect the property you care about if you filed Chapter 7 bankruptcy? A lot of people are afraid that if you file Chapter 7 bankruptcy then the trustee will take everything and sell it all. That is not true. If you file Chapter 7 you are allowed to protect a lot of your property, and for many people they can protect all of it. But don’t automatically assume you will be able to protect all of it. What you are able to protect will depend on what you have, how much of it, and how much it is worth. If you are not able to protect all of your property, you will want to seriously weigh the pros and cons of filing Chapter 7 bankruptcy. Is it worth it to you to get the discharge and lose that property? In some situations, it might be worth it for someone to get $100,000 of medical debt wiped out even if it means they will have to give up $1,000 in an old savings account. But wiping out $10,000 in credit card debt doesn’t look too good if you might be losing a car or house. Even if Chapter 7 can get rid of the debt you want, you might want to explore other options if it can’t protect what you need it to.
3. Is it a smart move financially?
In many circumstances, Chapter 7 bankruptcy might be able to get rid of all of a person’s debt and still be able to protect all of their property, but it might still not be a good move financially. Keep in mind, creditors can legally call you. They can send you letters. They can try to sue you. But none of that means that you necessarily need to hand over your money, even if you are not in bankruptcy. If you have no income, and nothing of any significant value a creditor could take even if they sued you, then a judgment won’t be much use – there is nothing to take and no income to garnish. “You can’t get blood from a turnip.” There are also certain assets and certain types of income that they cannot get even if they file a lawsuit and get a judgment against you (I.e. money in your 401K, or income from your Social Security check). It is also worth considering the value of the property you are trying to protect vs the fee to file bankruptcy. It doesn’t make much sense financially to pay $1.00 to buy fifty cents. Similarly, it doesn’t make much sense to spend $1,500 or so to file bankruptcy if you are not bringing in money and everything you own is only worth $1,000. Before you consider filing Chapter 7 bankruptcy you will want to figure out if those noisy (and often scary) creditors can actually do anything to you, and even if they can, would it hurt more to pay for bankruptcy or to just take the hit?
4. Could you qualify for it even if you wanted it?
If Chapter 7 bankruptcy would be a good decision, you still need to meet all the requirements to qualify. One of the requirements to qualify for Chapter 7 is your household income. If your household income is too high, there is a possibility that you may not qualify for a Chapter 7. But even if you are afraid your income is too high to qualify, don’t get discouraged. Don’t automatically assume you can’t qualify. Depending on the circumstances, an attorney might be able to help you find deductions that could help you qualify even if your income is above median. Sometimes the attorney can help you qualify, sometimes you may be limited to filing a Chapter 13 instead. But even in cases where it is unlikely a person can qualify for a Chapter 7, I find it is at least worth taking the time to check because a Chapter 7 is usually quicker, cheaper, and easier for everybody.
5. Will you be in a better position moving forward after bankruptcy?
It doesn’t do anybody a whole lot of good to dig out of a hole, just to get dropped off in the middle of mine field. Chapter 7 bankruptcy will only effect the debts you had as of the day you filed. That means any new debts you get after filing are here to stay, and there are certain time limits between when you can file for bankruptcy again. So, you are going to want to know:
- Is this the right time to file? Is the storm over (or at least winding down)? If you are still in the middle of a financial catastrophe it probably won’t do you a whole lot of good to file bankruptcy today just to take on a whole bunch of new debt tomorrow. Sure it will help out with the debts you had before you filed. But unless you have some reason you absolutely need to file now, you may be better off waiting until the storm has cleared before you file. If it is looking like the storm might be lasting for a long time (such as a chronic medical condition), depending on the situation, you may want to seriously consider looking into a Chapter 13.
- Have you fixed (or at least managed) the problems that caused this whole mess in the first place? Have you put yourself in a situation to avoid the same problems that caused you to file in the first place? Now, anybody who has lived more than 20-30 years knows that life will throw you way too many curve balls to prevent against everything. But if, for example, you have been devastated by medical debt, it might be a good idea to buy some health insurance so that you won’t get crushed again in case another health problem arises.
Chapter 7 bankruptcy is a useful vehicle to get people out of a bad financial situation. Everybody’s situation is a little bit different and you will want to consider several factors before filing. If you have any questions about whether it is the right choice, you are always welcome to contact us for a free consultation.