Should I File for Bankruptcy? How to Know When It’s Time for Bankruptcy

According to the Administrative Office of the U.S. Courts, there were 772,646 bankruptcy filings in 2019.

Many people view bankruptcy as a last resort. Done rightfully, filing for bankruptcy can be a second chance and not a death sentence. However, don’t be fooled – filing for bankruptcy does come with some impact.

If you’re asking yourself, “Should I file bankruptcy?” Here is a guide to educate you on making the right choice.

Should I File Bankruptcy?

While bankruptcy is more of a second chance than a last, desperate option, you still need to realize when it’s the most suitable solution. Some of the situations that should compel you to consider bankruptcy include:

1. Foreclosure

There are instances where you can stop foreclosure on property you own by filing for bankruptcy.

For starters, when you file for bankruptcy, lenders and other creditors will have to stop collecting from you due to the automatic stay order that comes into effect.

If you’re filing a Chapter 7, the relief won’t last. However, a Chapter 13 bankruptcy will provide you relief that can enable you to catch up on your mortgage payments and retain ownership of your house.

On the other hand, for those who file for Chapter 7 bankruptcy before the foreclosure process ends, their mortgage debt will be canceled fully.

As a result, you won’t be on the hook for the difference between your mortgage balance and the auction price (called a deficiency).

Such relief is critical as you will be liable for taxes on the deficiency even if your lender forgives the debt.

2. You Have a New, Higher Paying Job

If you’ve been considering filing for Chapter 7 bankruptcy, starting the process immediately after receiving a better-paying job is critical.

All applicants for Chapter 7 bankruptcy usually undergo a means test. The means test will assess your average income over the last six months before your fling.

If you have just taken up a better paying job, any month you waste without filing is a month you increase your average earnings.

3. Medical Bills Not Covered by Your Insurance

Medical bills are a top reason for many bankruptcy cases. Even in cases where a patient may have health insurance, they may still need to file for bankruptcy due to hefty bills.

If you need to take this route, applying for bankruptcy can help you get relief through a total discharge of outstanding medical bills.

Alternatively, you may receive a restructuring plan that gives you a three to five-year period to manage payment.

4. You’re Being Sued for Unpaid Debts

Are you creditors on your neck, taking you to court to seek what you owe them?

If they have already passed your case to a debt collection agency that failed to recover the money, a lawsuit may give them a valid claim.

Just like with foreclosure, when you file for bankruptcy, it will lead to an automatic stay order. That means the creditors will have to fall back from pursuing you for repayment.

With that said, there are certain types of debts bankruptcy can’t forestall.

These include outstanding child support, student loans (public or private), unpaid income taxes, alimony, court fines, and any debts you don’t list in your bankruptcy papers.

5. You’re Paying Bills Using Your Retirement Account

It’s tempting to think that you can settle bills using your retirement money. After all, won’t you just save up again?

Many states will offer protection for your retirement funds during bankruptcy. Thus, you can file for bankruptcy, bring the debts and/or bills under control and keep your 401(k), IRA, pension, and life insurance.

You’ll need to check with your state for the specific items that fall under this protection.

Who Is Eligible to File for Bankruptcy?

There are several conditions your case must meet for it to merit a Chapter 7 or 13 bankruptcy.

For a start, you must be 90 days behind on all the debts you plan to discharge.

If you’re filing for Chapter 7 bankruptcy, your monthly earnings need to be below your state’s median monthly income (for a household of your size).

To get this median income, add your gross earnings over the last six months and divide by six. Take the result and subtract ‘allowable’ and ‘reasonable’ expenses from it.

These expenses include the amounts you spend monthly on essentials like food, transport, and housing. The remaining amount is the net income you can settle debts with.

What if your average monthly income is more than your state’s median figure for the same? You can still qualify for Chapter 13 bankruptcy in some cases.

What You Should Know Before Filing for Bankruptcy

Bankruptcy is not a frivolous decision. Some things to keep in mind before filing include:

1. The Impact on Your Credit

A Chapter 13 bankruptcy filing will stay on your credit report for seven years, while a Chapter 7 one will be listed for ten years.

Your credit score will take a hit of between 50 and 200 points with higher scores witnessing a steeper drop.

2. Court Meetings

When you file for Chapter 7 bankruptcy, you’ll have to attend a ‘Meeting of Creditors.’ That only happens once.

For Chapter 13, however, you will have two court meetings – the ‘Meeting of Creditors’ and another confirmation hearing.

3. It Becomes Part of Public Record

Once you’ve filed for bankruptcy, future potential lenders will be made aware of your application.

Your employer may also become aware of your bankruptcy application as it becomes part of public record. However, your employer won’t have the power to fire you for filing for bankruptcy.

4. Compulsory Financial Counseling

You will be required to undergo lessons on financial literacy. One class will happen before you file, and the other class once your bankruptcy is discharged.

Get Your Finances in Control

Filing for bankruptcy can be intimidating, yet doing so can offer you a lifeline to take charge of your finances. Before you begin the process, ask yourself, “Should I file bankruptcy?” To better understand your options and what comes after.

Are you looking for the latest financial news? Check out more of our content to find ideas and tips to help you take charge of your finances.

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Interesting related article: “What is Bankruptcy?”