When to File Bankruptcy

Deciding when to file bankruptcy can be a crucial decision for individuals who are facing various financial challenges, such as foreclosure, substantial debts, mortgage payment defaults, or persistent harassment from creditors. While filing for bankruptcy can potentially offer relief by reducing or discharging debts and preventing home repossession, it may not always be the optimal choice. 

It is important to weigh the potential benefits against the potential drawbacks, such as long-term damage to credit scores, which could impede the ability to secure future loans, elevate insurance rates, and hinder job opportunities. Therefore, individuals must carefully consider their financial situation and consult with experts to determine if and when to file for bankruptcy.

Different Types of Bankruptcy

Bankruptcy cases are handled by federal courts. Six types of federal law exist, the two most prevalent being Chapters 7 and 13. These designations correspond to sections in the federal bankruptcy code. Chapter 11 bankruptcy is often utilized by businesses.

Chapter 7 bankruptcy, also referred to as straight bankruptcy or liquidation, is the most common type of bankruptcy. In this process, a court may appoint a trustee who will sell some of your assets and use the proceeds for partial repayment to creditors. After this has been completed, any remaining debts will be discharged. Certain types of property are exempt from liquidation; these include cars, clothing, household goods, tools of the trade, pensions, and any equity you may have in your home – so make sure you declare any exempt property when filing bankruptcy.

Chapter 13 bankruptcy is a court-approved plan that allows you to repay all or part of your debts over three to five-year periods, with the possibility of discharging some obligations.

Some types of debt cannot be discharged through bankruptcy. Examples include student loans, child support obligations, and tax obligations.

The Bankruptcy Filing Process

Filing for bankruptcy involves a series of legal steps; failure to follow them could result in your case being dismissed.

Before filing for bankruptcy, individuals must attend a credit counseling session and obtain the certificate needed to file their petitions. Counselors assess your situation and offer advice about budgeting and debt management as well as discuss potential bankruptcy options with you. The federal bankruptcy court nearest you can provide the names of approved credit counseling agencies upon request.

Filing for bankruptcy requires you to submit a petition along with financial statements displaying your income, debts, and assets. A means test form may also be necessary; this determines if your income is sufficient enough to file under Chapters 7 and 5 otherwise, Chapter 13 must be chosen. A filing fee will be assessed. However, it can often be waived if proof that you cannot afford it.

The bankruptcy court can provide you with all of the forms needed

The 341 Meeting

Once you file for bankruptcy, the trustee will organize a meeting with creditors (known as a 341 meeting according to a section of the bankruptcy code). This meeting provides creditors who owe money the opportunity to ask questions about their financial situation and receive advice. Based on the information provided, a bankruptcy judge will decide your case. Unless it involves significant complexity, however, you won’t need to appear before them for a decision.

After filing for bankruptcy, you must attend a debtor education class to gain advice on money management and budgeting. Once completed, you must obtain a certificate to prove your participation. A list of approved debtor education providers can be obtained from either the bankruptcy court or Justice Department.

If the court rules in your favor, Chapter 7 will discharge your debts and Chapter 13 will approve a repayment plan. A repayment plan can then be put into place through Chapter 13.

Bankruptcy: The Consequences

Each type of individual bankruptcy has its own set of negative repercussions. Both types have some lasting effects; a Chapter 7 bankruptcy will remain on your credit report for ten years, while a Chapter 13 will typically remain on 9.

Experian, one of the three largest national credit bureaus, states that declaring bankruptcy can have a major impact on your credit scores. 10 This may give the impression that you are low risk to prospective employers and other lenders.

Be aware that bankruptcy has limits on how often debt can be discharged. Furthermore, keep in mind that each year the process must be completed for discharge to take effect.

Do I Need a Bankruptcy Lawyer?

Individuals and partnerships have the option to file bankruptcy without legal counsel, known as “pro se” filing. 6 However, filing bankruptcy is complex and should only be attempted with experienced legal representation – usually an experienced attorney familiar with bankruptcy proceedings. This type of filing for bankruptcy should only be done once.

Even the Internal Revenue Service can negotiate on your behalf. In certain situations, you may be able to reduce your tax liability or spread out payments over a longer period of time.

Alternatives to Bankruptcy

Although bankruptcy may seem like the only option to escape financial ruin, you don’t have to use it as the only route. There are other ways of reducing your debts without going bankrupt – here are some alternatives!

Negotiating with creditors without going to court can sometimes work in your favor. Instead of risking nothing, a creditor may agree to a repayment plan that reduces or spreads payments over a longer period.

If you’re having difficulty paying your mortgage, contact your loan provider immediately. You might also consider forbearance which allows you to stop making payments temporarily or a repayment plan that spreads smaller monthly payments over a longer period. Another viable option is loan modification which alters loan conditions by lowering interest rates and making it easier to repay. Be wary of unsolicited offers by companies offering to keep your house from foreclosure; these could not be legitimate businesses.

An offer to compromise is a way for taxpayers who owe the IRS money to pay less. If they’re having difficulty making all their payments at once, the IRS offers monthly payment plans as an option for taxpayers facing financial strain.

Conclusion: When to File for Bankruptcy

The purpose of bankruptcy law is to provide relief for individuals who have accumulated an overwhelming amount of debt, which can result from unforeseen circumstances such as hefty medical expenses. However, the bankruptcy process is complex, and its outcome may not always be favorable. 

Therefore, it is crucial to explore all available alternatives and consider the potential negative consequences before making a decision to file for bankruptcy. Despite this, if bankruptcy is deemed to be the only feasible option, it is essential to recognize that the negative impact on credit scores will not be permanent. By using credit judiciously and ensuring timely payment of bills, individuals can gradually rebuild their credit and move past the bankruptcy episode.

Need Help from an Experienced Bankruptcy Lawyer?

If you are struggling with overwhelming debt, facing creditor harassment, or at risk of losing your home or assets, Bruner Wright P.A. can provide you with the legal support you need. Their bankruptcy attorneys will work with you to understand your unique situation, explore all available options, and guide you through the bankruptcy process, ensuring that your rights are protected every step of the way.

Services We Offer:

With a focus on compassionate and personalized service, Bruner Wright P.A. is dedicated to helping clients achieve a fresh financial start. Contact them today to schedule a consultation and learn more about how they can assist you in your bankruptcy case.