Can Bankruptcy Help Me?
If a debtor is unable to pay all of their bills, bankruptcy protection may offer the best solution for them going forward. To see if a Chapter 7 bankruptcy is in their best interest, three questions need to be answered:
1. Are there any other options to bankruptcy that will yield a better result?
2. Does the income of the debtor exceed the allowable limits to file for Chapter 7 bankruptcy relief?
3. What assets, if any, does the debtor own that cannot be exempted under the law?
Question 1: Are there better options to reduce debt?
Sometimes difficulty in paying bills is due more to lifestyle choices than to a shortage of income or excess of debt. However, these days, with the wide range of economic difficulties, most debtors have already cut far back on their discretionary spending.
Sometimes negotiation with creditors, whether mortgage holders, credit card companies, medical service providers, collection agencies, and the like, is more economical and less impactful to the debtor than filing bankruptcy. However, with the total cost of bankruptcy ranging between $1,400 and $1,900 (and much more with some attorneys), the outstanding balances on all of the debtor's accounts would have to be negotiated to almost zero to make this a better option.
This is why debt consolidation companies usually are not a good choice. The fees paid to these businesses are usually higher than those paid to an attorney for bankruptcy representation, and all they can offer is the hope of some reduction in the amount left owing to creditors.
Bankruptcy reduces the amount owing to zero. This covers all debts that are dischargeable under the law. The process is also much shorter, usually about 100 days, than the several years it takes to pay through a consolidation plan.
Further, if a debtor's credit score has already been substantially reduced by a few late payments, the quickest way to a better credit score is not through years of struggling to pay off consolidated debts, but rather to get the "fresh start" that bankruptcy provides.
Bankruptcy is not "rock bottom." It's a huge step up from whatever bottom the debtor has hit. Creditors are much more likely to lend to someone fresh out of bankruptcy than someone who is still stressed with consolidation payments.
This is for two reasons. One, creditors know that any new loans to someone emerging from bankruptcy cannot be discharged by a second Chapter 7 filing for eight years. Two, creditors know that such a person has just wiped out a lot of debt that they will never again have to pay.
Each debtor knows their own finances, even those who have not done the best job of managing them. If all of the bills just cannot be paid any longer, then bankruptcy may well be the best way forward.
Question 2: Does the income of the debtor exceed the allowable limits?
In 2005, bankruptcy law changed to include income restrictions on the use of Chapter 7. In short, if a debtor makes "too much" income, as defined very specifically and in very complicated terms under the law, then Chapter 7 would not be an option.
Many web sites offer "means test" calculators to help determine if one qualifies for bankruptcy liquidation. While some of these sites may be accurate in their calculations, the answer obtained by using them is only as good as the information provided.
Failing to include certain income may yield a false positive result, while failing to include all permissible expenses, either actual or standard IRS allowances, may produce a false negative answer. Getting the right answer to this key question is certainly worth the cost of bankruptcy representation.
For more information about the income qualifications of Chapter 7 bankruptcy, see the Means Test page or call for a free consultation.
Question 3: What assets are not exempt?
The assets of the debtor must be closely examined to see if any non-exemptible equity exists. If all the assets of an individual can be exempted under the law of the applicable state against liquidation by the trustee, then bankruptcy remains a viable option.
If, however, some assets may, or will, be sold by the trustee to pay off some of the debtor's bills, then closer analysis must be done to see if bankruptcy is still in the debtor's best overall interest. If the loss of assets is small in terms of value to the debtor, then bankruptcy would likely still be a good option. If the loss is large, then other options may appear more attractive.
For more information about exemptions, see the Exemptions page or call for a free consultation.
If you cannot pay all your bills, and:
1. There are no better options, and
2. Your income qualifies under the guidelines, and
3. You will not lose any assets in bankruptcy,
- then filing for bankruptcy protection is likely the best way forward. If this applies to you, see the "When Do I Stop Paying" article.
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