Is Bankruptcy Right for Me?
Before we go any further, it’s important to keep in mind that the person who can best answer this question is an experienced bankruptcy attorney. Most reputable attorneys will offer a free consultation, so the only cost to find out if bankruptcy is right for you is a little of your time. But don’t stop reading because there’s still a lot you can learn on your own, right now, from the comfort of wherever you are reading this.
Do You Have Enough Debt in the First Place?
First things first. If you are reading this, then you more than likely have a problem with debt, or you know somebody else who does and you are kind of enough to do some research for them. You might also be the sort who just likes to read about bankruptcy. That would make you an unusual person, but thanks for your time and consideration.
It’s important to know whether or not you have enough debt to make it worth your while to file for bankruptcy. Bankruptcy, after all, is not free. Even if you’ve found an attorney who is willing to take on your case for free (highly unusual) you’ll still have to pay court filing fees, which currently are more than $300 dollars. Additionally, you’ll have two credit counseling classes that cost money as well. These classes are required by the court and usually only cost about $20 each or so.
Then you’ve got to consider the very realistic possibility that you will have to pay an attorney to file your case. Most attorneys offer payment plans which should make paying their fees less painful. Everyone is probably aware by now that attorneys aren’t cheap. And if you find one that is, there’s a good chance he or she is cheap for a reason. Maybe they are fresh out of law school, or maybe they’re new to the bankruptcy field and are trying to get their feet wet by offering their services at a substantial discount.
Do you want a newbie to handle your case? You do realize that when you file for bankruptcy, everything you own temporarily becomes the property of the bankruptcy court? If it hasn’t been properly protected (the job of your attorney), there’s a lot you can lose. And on top of that, it can cost you the chance of ever filing bankruptcy on those debts again. Bankruptcy is nice, safe, and predictable when you file with a seasoned attorney, but it’s risky and unpredictable if you file with an attorney who is not familiar with all of the tricky details.
Do You Have the Kind of Debt That Will be Eliminated?
Not all debts are eliminated by bankruptcy. Does it make sense to go through all of the time, hassle, money and effort to file for bankruptcy if you’re just going to be stuck with debt after you file anyway?
So let’s take a look at the type of debts you can eliminate, and maybe more importantly, the type of debts you cannot.
Unsecured debt is the key. Virtually all unsecured debts can be eliminated when you file for bankruptcy. You may ask, what exactly is an unsecured debt?
A debt is unsecured if it has no collateral guaranteeing the debt. For example, a credit card is not a secured debt. When you originally filled out that credit card application, did you promise that if you didn’t pay your card the bank could take your house? No. At least we hope that you didn’t. That would be a very, very bad idea. Of course, the federal government doesn’t allow this practice for credit cards. If it did, then you’d probably be able to get a credit card secured by your home. So thank goodness you cannot, because you could lose your house by missing a credit card payment.
An interesting fact many people don’t realize about bankruptcy is that more debts are eliminated by filing than they realize. Even debts secured by something like a car or a home are completely eliminated when a case is filed.
Do you mean I can file bankruptcy, eliminate the mortgage on my house, and go on living there? Bankruptcy has got to be the greatest invention known to man! Everyone should do it, especially if they own a house!
Well, you don’t have it quite right. Here’s the issue. When you file for bankruptcy, the debt on lots of stuff – even secured stuff – is technically eliminated. However, when the debt is secured, the bank can go ahead and take back the asset that secures the debt because you signed a collateral agreement.
So yes, when you file for bankruptcy, your mortgage is technically eliminated. But, your mortgage company is allowed to kick you out of your house and take back the home and resell it.
If your goal is to move out of your house and eliminate the mortgage through bankruptcy, then go for it. But if your goal is to keep your house and eliminate the mortgage at the same time, no can do. The same goes for a car, or any other asset that is secured by property.
This brings us back to credit cards and unsecured debts in general. A credit card is an unsecured debt so there’s no collateral the credit card company can go after when you file for bankruptcy. Therefore, when you file for bankruptcy, the credit card debt is eliminated, and there’s nothing the credit card company can do about it (in most situations).
What Other Debts Are Unsecured Debts?
Well… any debt that isn’t secured by collateral.
You probably want a more useful answer than that. How about some examples.
Medical debt is unsecured. When you go to the hospital they don’t ask you to sign your liver away as collateral in case you can’t pay your medical bill.
Personal loans are often unsecured. There are a lot of terms for this type of loan. Some people call them payday loans or cash loans etc. But typically, this type of loan is for a fairly small dollar amount (often less than a few thousand dollars) and is not backed by any form of collateral. When you file for bankruptcy, these go bye bye.
Great! We are on a roll. Let’s add more to the list so we can eliminate more debts.
Student loans are unsecured debts.
Yay! I’ve got tons of student loan debts. Let’s get those eliminated!
Screeeeechhhhh! Put the brakes on!
Student Loans and Other Unsecured Debts That Don’t get Eliminated in Bankruptcy
Warning. What follows will be fairly depressing if you just think about it for a second. But, don’t skip reading it, because you’ll need to know this if you plan to file for bankruptcy.
Student loan debt is unsecured. So is tax debt (unless the IRS or state files a lien against your property). Child support is also unsecured debt (although you can go to jail for not paying it). Government fines are unsecured debt and so is spousal support and alimony.
So what do these things all have in common, other than the fact that they are unsecured and the fact that you said they would be depressing, which so far they are not?
Well here’s the depressing part, just like the punch line to some terrible joke on a comedian’s bad night.
All of these debts are unsecured, but the bankruptcy laws have made exceptions for each of these categories that make them survive your bankruptcy. You can file chapter 7 every eight years when you become eligible again, and you’ll never eliminate these types of debts – at least not automatically.
There are a few exceptions. In some cases, you can eliminate tax debt. Usually it’s only certain tax debts and they must be more than three years old. In even rarer circumstances, you can eliminate student loans. This is pretty unusual and pretty complicated. If you want to know for sure, give a bankruptcy attorney a call.
Filing to Protect Your Assets
There’s one more situation when you’ll want to file for bankruptcy even if you’ve got little to no debt to eliminate. When you’ve got a secured debt such as a home or vehicle that you are behind on, you can file bankruptcy and keep a foreclosure or repossession from taking place. There are times when individuals fall behind on a secure debt and don’t have the money to completely catch up. By filing for bankruptcy, people in this situation are given protection from their creditors and allowed time to catch up on payments, all while being completely protected by the federal bankruptcy laws.
Chapter 13 bankruptcy is the chapter most often used in this scenario. As part of your bankruptcy, you will have a payment plan through the court. A monthly payment will be made to your bankruptcy trustee. If you have unsecured debt, you will sometimes have to pay a portion of it back through this pay plan. But it is through the payment plan that you are able to gradually pay back what you are behind on like your home or car, so it’s your ticket to protecting your asset. A payment plan sure beats being forced out of your home or waking up to your car being towed down the street by the repo man.
Are You Eligible to File for Bankruptcy?
Unfortunately, not everyone is eligible to file for bankruptcy. If you’ve filed bankruptcy before, you’ll have to wait a certain number of years to file again, depending on the type of bankruptcy you’ve filed in the past, and the type you plan to file in the future.
There are income limitations on filing for bankruptcy as well. The rules look at an average family in your area. If you make substantially more money than the average family where you live, you aren’t going to qualify. A good way to find out for sure if you qualify for bankruptcy is to call an experienced bankruptcy attorney. Worst case scenario, if you don’t qualify for a chapter 7, you’ll probably qualify for a chapter 13. The downside to the 13 is that you’ll have to more than likely pay some of your debt back. But you will still end up eliminating a good portion of your debt in most cases.
The Wrap Up
As we have seen, bankruptcy is not for everyone. You have to have enough debt to make it worth filing in the first place. You have to have the kinds of debts that will be eliminated or an important asset to protect. Finally, not everyone qualifies for bankruptcy. But, for a lot of people, bankruptcy is the best way to wipe the slate clean and move on with your life debt free.
You can contact an experienced bankruptcy attorney at Meyer Law for a free consultation.