The economy is tanking. Businesses are closing. People are being laid off. Congress is endlessly debating another stimulus package but has adjourned for the summer. COVID-19 shows no signs of going away soon, nor is there a vaccine projected to arrive before 2021. With all this bad news, some people are asking, should I file bankruptcy?
It’s not a yes-no question. Filing bankruptcy is a very personal decision. Circumstances that might cause one person to file might not be enough to cause another to file. Before a person can decide whether to file, she needs information.
The debtor should consider her current financial situation as part of the decision to file bankruptcy:
• Does she have a job?
• Is there a danger of being laid off or furloughed?
• If she’s been furloughed, is there a good possibility of being brought back? If so, when?
Bankruptcy is a last resort, meaning after all other options have been explored and either tried and failed or rejected for whatever reason, then all that remains is bankruptcy.
There is a consequence to filing bankruptcy. It’s not as severe as many people believe, though. It’s not a permanent scar on your credit; it’s more like a scab that will gradually disappear as time passes. The fact of filing bankruptcy will be on your credit report for 10 years. As time passes, though, the bankruptcy becomes ancient history. Most of my clients report that within 2-4 years after they get their discharge in bankruptcy, they are able to get credit on terms no less favorable than those of people who haven’t filed. Also, consider what the credit report looks like anyway. If there are judgments, collections, repossessions, wage garnishments, charged off accounts and foreclosures, a credit report isn’t the best in any case and bankruptcy will hardly make it worse.
Here are some warning signs that a person should consider bankruptcy.
• Job loss. If a person doesn’t have a job, she can’t pay her bills in most cases. Depending on how long she anticipates being out of work, bankruptcy might be necessary.
• Divorce. Divorce is a leading cause of bankruptcy. Two cannot live as cheaply as one. If one spouse files bankruptcy, it’s almost inevitable that the other will have to shortly.
• Unexpected and uninsured medical expenses.
• Not enough money left at the end of the month. If a person is robbing Peter to pay Paul by skipping one bill this month to catch up on another, or using credit cards to pay other bills, it’s a sign that something is fundamentally wrong with the budget.
• Collection lawsuits. Once it gets to the point that creditors start to sue, things are really bad.
• Repossessions or foreclosures. These go hand-in-hand with collection lawsuits.
• Wage garnishments. In Utah, a creditor with a judgment can take up to 25% of a debtor’s take home pay. Living on 75% of what a person earns is nearly impossible.
• Bill collectors calling every day. This is the last step before lawsuits start. Rather than let things go to collection lawsuits, it might be better to file sooner than later.
• A debtor is considering taking out a line of credit or withdrawal from a 401(k) or IRA to pay bills. DON’T DO IT. There are all sorts of reasons not to do this.
Once a person decides she must file bankruptcy, the question becomes, which type of bankruptcy to file? There are two main types, known as Chapter 7 and Chapter 13. Chapter 7 is the more common and is sometimes called a straight bankruptcy. It’s what most people think of when they think of bankruptcy. It wipes out most debts and is usually over within about four months. However, there are reasons why people would not choose Chapter 7.
Can’t Qualify for Chapter 7
The first is that they don’t qualify for Chapter 7. Chapter 7 is income based. If a person makes above a certain amount of money, she can’t qualify for Chapter 7 and must file Chapter 13. The income ceiling is the median income earned by a family of the debtor’s size in the county in which the debtor lives, so it can vary from state to state. Currently in Utah the median income for a single individual is about $62,000 per year.
Too Much Equity
Chapter 7 operates on the premise that the debtor turns over all her non-exempt property to the trustee, who sells it and uses the money he gets to make a partial payment to creditors. If the debtor has too much equity above any exemptions she is entitled to and any secured debt, she could lose the asset. This includes houses and cars. In that case, the debtor might choose to file Chapter 13 even though she qualifies for Chapter 7.
Chapter 7 doesn’t protect co-signers. If a debtor has a co-signer on a car loan, for example, the bank can pursue the co-signer even if the debtor is discharged. To protect co-signers, some debtors elect to file Chapter 7 even if they can file Chapter 13.
In Chapter 13 the debtor makes monthly payments to the Chapter 13 trustee, who then passes those payments on to the creditors. Chapter 13 is sometimes called a wage-earner plan or individual reorganization. The amount of the monthly payment and the length of time the debtor is in bankruptcy depend on the debtor’s particular circumstances. There are no typical Chapter 13 payments.
Do My Debts Qualify?
Another consideration before filing is whether the debts qualify for a discharge. A discharge is the whole point of bankruptcy. It’s a court order that the debtor does not have to repay a debt. Most debts are dischargeable, but some are not. These include most taxes, student loans, domestic support obligations (child support, alimony and the like), and court-ordered restitution in criminal cases. If a person’s debts are these, or these make up a large part of the person’s debts, filing bankruptcy might not be effective.
Talk With a Professional.
Filing bankruptcy is a big step. It can only be done once every eight years. It’s not something to be done lightly or without full and complete information about how it will affect the debtor. If you are considering bankruptcy and want to discuss whether it will help you, contact us here or call or text (801) 413-3708, or email email@example.com. The initial consultation is free.