Should I File for Bankruptcy?

If you’re deeply in debt and can’t envision a way out, then bankruptcy may seem like an obvious solution. However, there are a number of factors to consider before taking that step.

Can I File for Bankruptcy?

There are two primary types of bankruptcy that consumers use: Chapter 7 and Chapter 13. In order to file bankruptcy under Chapter 7, you can’t have had a bankruptcy petition dismissed within the previous six months and you have to have participated in approved credit counseling within that same timeframe. In addition, you have to pass a means test. Under the law, your average monthly income from the previous six months can’t be more than your state’s median income. If it is, then you have to comply with an eligibility formula that determines whether or not you have disposable income with which to repay your creditors. If so, then you are only eligible to file for Chapter 13 bankruptcy.

In order to file for Chapter 13 bankruptcy, your debts (not including your mortgage, your car, or other secured debt) must be less than $394,725 and your secured debts (those that have been used as collateral) must be less than $1,184,200. In addition, you can’t have had another bankruptcy petition dismissed within the previous six months and you have to have participated in credit counseling during that timeframe.

When Should I File for Bankruptcy?

Filing for bankruptcy might feel like a godsend, but there are repercussions. For example, if your home is in foreclosure, you’ll likely lose it in a Chapter 7 proceeding, but you’ll likely keep it in a Chapter 13 proceeding. In addition, a successful bankruptcy will stay on your credit report for up to ten years, which will impact your ability to borrow money in the future.

It’s worth considering that bankruptcy might not be your only option for getting out from under your debt. For example, portions of your debt may be time-barred. Each state has a statute of limitations, after which a creditor can no longer sue you and obtain a judgment against you. If you are able to wait out the clock, that could be a better choice than bankruptcy.

It’s important to thoughtfully review all of your debt obligations. If you went on a spending spree in the past six months, that credit card debt may not be dischargeable in bankruptcy. If a family member co-signed a loan with you, then they may be on the hook for paying off that debt. If you were dishonest on a credit application, then the resulting debt may not be erased in your bankruptcy.

Similarly, review the types of debts that are not dischargeable during a bankruptcy. Examples include back taxes, spousal and child support, and student loan debt. Evaluate whether or not the amount of dischargeable debt is worth bankruptcy.

It’s just as important to thoughtfully review all of your assets. For example, if you have retirement savings or a pension plan, you need to know if that will be liquidated in Chapter 7 proceedings. Similarly, a second home or a second car might be seized, as might your family jewelry or other collectibles.

Deciding to Move Forward

If you think that bankruptcy is a step you’d like to pursue, it’s important to speak with a bankruptcy attorney. The bankruptcy process is complex and very difficult to navigate on your own. An attorney can help you assess whether or not you should file for bankruptcy and, if so, which type of bankruptcy petition you should use.