One of the most common questions I get asked is if filing bankruptcy is the right thing to do? This of course, depends on many factors, so I thought I'd provide a brief outline on some of the important points to consider. By looking at these points, it can help you determine if filing bankruptcy is right for you. Of course, filing bankruptcy is is not merely a financial decision; it's also personal and emotional. The following checklist was developed over many years of talking with many people who are overwhelmed with debt and it can help you determine whether discharging debt makes sense. If you meet all seven points, then filing bankruptcy could your best course of action.
Are you eligible to file? If you have enough money to pay your creditors, you may be ineligible to declare chapter 7 bankruptcy, so how is this determined? There some paperwork to complete which lists your assets and liabilities and you need to pass the "means test". If you make less than the median income for your state, you're fine.
You don't see your situation improving in the near future. Now look into the future: You may be overdrawn financially and living on the edge today but perhaps you have a better paying job up ahead. Or maybe you're due to come into money with a gift or inheritance. If your hardship is temporary, and you foresee more cash flowing in the next year, you may want to wait it out. When your circumstances improve, you can apply more to your debts and pay them down much faster.
Most of your debts are unsecured. Not all liabilities go away in bankruptcy. Bankruptcy may discharge unsecured debts like credit and charge card balances, medical bills and collection amounts. However, student loans, recent tax debt, many legal bills and child support amounts are among those you're stuck with. In addition, the liens on secured debt - like mortgage and car loans - generally pass through bankruptcy unscathed, meaning your obligation to pay them remains. So assess your liabilities: If the bulk is dischargeable, then filing for bankruptcy will have a greater impact on reducing the amount of debt that you owe.
You understand (and accept) the downside of bankruptcy. Before walking into court, you're required to get approved bankruptcy education and credit counseling. These specialized classes, often conducted online, cover what can happen to you if you file. You'll learn about the damage bankruptcy leaves behind and the type of property you may have to surrender. This counseling will give you the opportunity to gauge whether or not you are comfortable having a bankruptcy notation on your credit report for 10 years. Make sure that you understand and are OK with bankruptcy's consequences.
You have no other good options. Bankruptcy may not be the only way out of your "nightmare." Another legal alternative to Chapter 7 bankruptcy is debt settlement and or credit negotiation. Your debt is restructured and portions may be discharged but costs are reduced by getting better interest rates and or rolling all of your smaller debt amounts into one easy to manage payment. I would still consider credit counseling. These nonprofit organizations have arrangements with most major creditors to reduce interest rates, and their debt management plans are designed to get you out of debt in fewer than five years.
You're comfortable walking away from your financial obligations. Don't discount the emotional reaction to bankruptcy. Though many feel relieved afterward, others feel upset and ashamed. Therefore, take plenty of time to project how you might react to "being bankrupt". Many people don't fully consider the emotional aspects of filling bankruptcy.
You will be in a better place if you do. Bankruptcy's big advantage is that it allows filers to make a fresh start and make lasting, positive changes to the way they treat money. It's great that bankruptcy can allow you to wipe the slate clean and have a second chance. It's important not to make the same mistakes and wind up in debt again, fast. So think: If you were to discharge your allowable debts, would you know what to do differently? And are you willing and able to make that commitment?
So now you may have a pretty good idea if Chapter 7 bankruptcy is right for you. If you still have questions or would like some further information on any aspect of filing bankruptcy or it's alternatives. I offer a free 30 minute telephone consultation where we can discuss your specific situation in more detail and you can get all your question answered.