Should I File for Bankruptcy?

When you are deciding whether to file for bankruptcy protection, there are many factors to consider whether it makes sense for you.  Before deciding whether to file for bankruptcy, it can be helpful to understand the following:

• Types of debt addressed by bankruptcy
• What type of bankruptcy to file
• When to file for bankruptcy
• Alternatives to bankruptcy, and
• Things not to do if filing for bankruptcy.

The information in the post is general information and will not apply in all situations.  If you are considering filing for bankruptcy, we urge you to contact our office and schedule a consultation.

Types of Debt:

Debts are often referred to as secured debt (mortgage payment, car payment) and unsecured debt (credit card debt, personal loans, and medical bills).  Unsecured debt can be further described as priority debt  (unpaid tax debt) and nonpriority debt (credit cards, medical bills, personal loans, including student loans).  Finally, not all debt is dischargeable.  For purposes of bankruptcy, a discharged debt is a debt that the debtor is no longer required to pay.  Bankruptcy can discharge many types of debt, but not all.

• Debts Typically Discharged
  • Credit Card debt
  • Unsecured loans
  • Medical Bills
• Debts Generally Not Discharged
  • Secured loans
  • Unpaid tax debt
  • Alimony and child support obligations
  • Student Loans

Regardless of the type of debt you have, once you file a bankruptcy, creditors must stop all collection activities.  This is the automatic stay and one of the most important tools available to people who are facing foreclosure, a repossession of car, garnishment, or creditor harassment.

When you meet with a bankruptcy lawyer, it is important to discuss all of the different types of debt you owe as the types of debt can change the analysis of your situation.  Depending on the debt you owe, the lawyer may recommend a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

Different Types of Bankruptcy

Chapter 7 Bankruptcy – A Chapter 7 bankruptcy is often referred to as a liquidation bankruptcy.  In order to qualify for a Chapter 7 bankruptcy, your household income must be below the median income for a household of your size in New Mexico.  You may still be able to file for a Chapter 7 bankruptcy even if your income exceeds the median income if you are able to pass the means test.

If you qualify for a Chapter 7 bankruptcy based on your income, some of your property may be sold to pay back your unsecured creditors.  The term liquidation is confusing to many people because generally, the people who have the income to qualify for a Chapter 7 do not have an unexempt property.

When you file for bankruptcy protection, you must list all of your assets; such as your home, your cars, your clothing, furnishings; and jewelry.  There are exemptions that exempt your property from the bankruptcy.  For example, if you own your home, we can use the New Mexico exemptions to protect your equity up to $150,000 if you are single and up to $300,000 if you are married.  Essentially, the property is protected and you keep those assets after the bankruptcy is over.

If you have nonexempt property, such as a second home, a luxury car or expensive jewelry, that will not be protected.  The Chapter 7 trustee may take your unexempt property and sell it to pay back your creditors; that is the liquidation part of the Chapter 7 bankruptcy.  Again, generally, people whose income qualifies them for a Chapter 7 do not have nonexempt property.  If, however, you do have nonexempt assets, then you will want to consider a Chapter 13.

A Chapter 7 bankruptcy is a good option for you if you don’t have a high income, you don’t have nonexempt assets and your debt is mostly unsecured debt, such as credit card debt, personal loans, medical bills or deficiency amounts on repossessed vehicles.

Chapter 13 Bankruptcy

For those who qualify for a Chapter 7 bankruptcy, it is typically completed within 4 to 5 months of filing.  A Chapter 7 bankruptcy is a relatively quick process.  A  Chapter 13 bankruptcy, however, can last between 3 to 5 years, depending on your income.

A Chapter 13 bankruptcy is often referred to a “wage earner’s bankruptcy”.  A Chapter 13 bankruptcy allows those who have a regular income to restructure their debts to pay back what they can afford.  Both a Chapter 7 bankruptcy and a Chapter 13 bankruptcy both offer the automatic stay and the ultimate benefit of discharging most debts.

A Chapter 13 bankruptcy also offers ways to deal with secured debt and tax debt in ways that a Chapter 7 bankruptcy cannot.  For example, a Chapter 13 bankruptcy can allow a person to catch up on past due mortgage payments, which allow the person to keep their house.  A Chapter 13 bankruptcy can also help a person catch up with past due car payments and possibly reduce the amount on the car loan.

A Chapter 13 bankruptcy may be a good option for you if your income is too high, you have non-exempt assets, you are behind on your mortgage or your car payments or you need to deal with unpaid tax debt.

How Bankruptcy Can Help

Our financial lives can be difficult and certain situations can make our financial situations worse, such as:

• Job Loss;
• Medical illness; or
• Divorce.

You may want to consider filing bankruptcy before the following situations occur:

• Creditors are suing for debt repayment. Creditors will eventually seek to have your wages garnished or your bank account levied to pay back the debt;
• You are facing a foreclosure or a repossession;
• You can only pay for your necessities with a credit card;
• You are using one credit card to pay another (robbing Peter to pay Paul); or
• You are considering borrowing from your 401K.

You may want to wait on filing for bankruptcy if you think you will incur additional debts that you will not be able to pay, such as additional medical debt.

Bankruptcy can help with protecting your wages, getting you caught up on secured loans and keeping your house and your car, freeing up your income to pay your bills and protecting your retirement for your future self.  Moving forward, bankruptcy can help with future financial stability by providing a financial restart button.

Filing for bankruptcy protection could potentially hurt your credit score.  However, if you are already missing payments or your debt-to-income ratio is high, you probably do not have the best credit score.  If your credit score is average or low, then a bankruptcy is unlikely to hurt the credit score very much.  Of course, if your credit score is good, then a bankruptcy will cause more damage.

Even if you do decide to file for bankruptcy protection and your credit score drops, you will be able to rebuild your credit.  Many of clients are able to obtain financing for a vehicle or qualify for a mortgage after their discharge.

A credit score is a number used by banks and other lenders to determine how much to charge you (in interest) for the privilege of lending you their money.  Sometimes, people’s credit score increases after the bankruptcy discharge because their high debt has been wiped out and their debt-to-income ratio has decreased.  We are not suggesting that you incur a lot of new debt after a bankruptcy discharge.  However, you will most likely be able to rebuild your creditworthiness after a bankruptcy discharge.

Alternatives to Bankruptcy

Bankruptcy is not the only tool available if you are struggling financially.  You may want to consider working with a nonprofit credit counseling agency.  They can provide information regarding debt management plans or debt settlement.  These programs rely on the creditors working with you and may not be the right option in dealing with your debt.

Sometimes, taking a second job can help with unmanageable debt.  We have had clients take a second job prior coming to see us about bankruptcy.  Although it can be option, we personally feel that it is not the best option.  Many times, people who have taken a second job do not see any substantial decrease on their debt and their mental and physical stress has increased.

Many of our clients have sold some of their property before coming to us to file for bankruptcy protection.  In some situations, it makes sense; such as getting rid of a large car payment or cleaning out their home of things they no longer want or need.  However, we have also had clients who sold all of their jewelry, including wedding bands, or other valuable items with sentimental value.  If they had come to see us before selling those items, then we would have been able to advise them regarding exempt property.

Depending on where you are in your financial life, bankruptcy does not have to be the only option.  However, it should not also be treated as the last option nor should you wait until it is the only option.  Many times, considering bankruptcy sooner rather than later, can protect your property as well as relieve the stress of trying to pay your unsecured creditors along with your living expenses.

Thing Not to Do When Considering Bankruptcy

If you are seriously considering filing a bankruptcy, then are some things that you shouldn’t do:

• Don’t take on new debt
• Don’t transfer or sell anything to anyone
• Don’t repay loans or money to family members or friends
• Don’t take out loans from your 401k or other retirement funds

If you have done these things, then you should meet with an experienced bankruptcy attorney who can advise on a path going forward.

Conclusion

If you are wondering whether you should file for bankruptcy, do your research.  The answer will depend on your financial situation, the type of debt you currently have (secured v. unsecured debt), your immediate financial plans and whether you see another way to resolve your financial situation.  Many experienced bankruptcy attorneys (including us!) offer free consultations. Even if you end up deciding not to file for bankruptcy relief, you will have more information on how to move forward with your financial situation.   It is an opportunity for you to learn whether bankruptcy makes sense for you.