Financial Factors to Consider When Determining Whether to File for Bankruptcy

Deciding whether to file bankruptcy can be a complicated decision. You must take into account your specific financial situation, goals, and personal preferences.

Among the factors to consider:

  • Is there a need for immediate bankruptcy court protection?
    • Probably the most powerful feature of bankruptcy is the so–called automatic stay. From the moment the case is filed with the court, the debtor and his property are protected from creditors. The automatic stay of bankruptcy is used regularly to stop foreclosures even minutes before the auction, halt garnishments, lawsuits and calls from collectors, or return repossessed – but as yet unsold – cars to clients. If you need to put a stop immediately to enforcement action, bankruptcy is the fastest and most effective way to do it.
  • Is the client’s income, compared to the total debt he faces, insufficient to pay it down in a reasonable amount of time, outside of bankruptcy?
    • One of the good things to come out of the economic crisis is the Credit CARD Act of 2009. It requires credit cards lenders to tell consumers the truth about minimum payments: How long and how much it will really take to pay off an account. Here’s a sample credit card statement:
      • Balance: $6,798.80
      • Minimum payment: $136
      • Number of years to pay off this debt at the minimum payment: 17 years!
      In Chapter 7 (the simplest bankruptcy), the debtor eliminates all dischargeable debt in about four months. Compare: 17 years or four months? Don’t fool yourself. Try this calculator “What Will It Take to Pay Off My Balance?” See how long it will take to pay off your own debt at a monthly payment you think you can afford. Remember also that credit scores are impacted negatively by carrying excessive debt. Beware of the common myths about bankruptcy.
  • What is the type of debt causing the financial distress?
    • Some debts are better dealt with in bankruptcy than outside. For example, tax debts, which can grow at a double–digit rate due to penalties, can be paid in an interest–free repayment plan in Chapter 13, thereby freezing the tax debt and keep it from growing. Some debts however are not discharged in bankruptcy, such as most governmental fines, student loans (unless you can show “undue hardship," a very difficult showing under the bankruptcy law), or loans taken out from lenders through fraud (but only if the lender files a formal lawsuit in the bankruptcy court asking the judge to deny you the discharge of that debt).
  • Does the debtor have property that is not protected under the exemption schedules in his jurisdiction?
    • This situation may entail some planning by your attorney to value the property and determine the amount of non-exempt equity (profit after sale), so that you can be fully advised as the options, including filing under the reorganization Chapters of 13 and 11, or a “purchase” of the equity (by a payment to the trustee in lieu of liquidation) or some other arrangement negotiated with the trustee.
  • Does the debtor need to keep specific property that is collateral for some loan which he or she cannot afford to pay?
    • One of the advantages of the reorganization types of bankruptcy, Chapters 13 and 11, is the legal right of the debtor to modify debts over the objection of the lender, by reducing the interest rate and total amount of the loan to the value of the collateral, in some situations. In Chapter 7, the redemption rights of a debtor can be employed to release the collateral from a large loan with onerous terms, if the debtor can obtain the funds to pay off the value of the collateral in a lump sum.

We take all of the different factors into account and then presents you with all options, including not filing at all. We see our role as advisers. Each person has different goals and objectives. You are the best judge of your needs. The only way to truly know if bankruptcy is the right choice is to schedule an appointment and go over the facts and documents in person.

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