Should You File Bankruptcy?

Should You File Bankruptcy?

 If you’ve ever been struggling with debt, you may have asked yourself should I file a bankruptcy? I can tell you that there are both advantages and disadvantages, and there is a lot to consider before deciding whether or not to file for bankruptcy.

What is Bankruptcy? 

Bankruptcy is a specialized type of lawsuit which is filed in federal courts.  Bankruptcy allows consumers and businesses to get relief from debts in hopes of getting a fresh financial start.  Bankruptcy cases are designed to help honest, but unfortunate, debtors create a financial fresh start without pressure from creditors trying to collect pre-existing debts.

Types of Bankruptcy

 The most common types of bankruptcy for individuals are called chapter 7 and chapter 13:

 ·         Chapter 7 bankruptcy discharges most types of debts without requiring monthly payments from you.  Chapter 7 is generally the preferred option when you have a large amount of unsecured debt, like medical bills and credit cards, and little income.  More than 85% of New Mexico bankruptcy cases are Chapter 7 cases.

 ·         Chapter 13 bankruptcy reorganizes your debt through a repayment plan, considered the best option if you have income, but want to save a home in foreclosure of your home, or if you are ineligible for a Chapter 7 bankruptcy.

 Advantages of Filing Bankruptcy

 The immediate advantage of filing bankruptcy is something called an “automatic stay.”  The automatic stay is a federal injunction that prevents your creditors from trying to collect money from you.  They cannot call you, send collection letters to you, file lawsuits against you, garnish your wages, or seize your assets — except in a few cases, such as in the collection of alimony and child support.

Disadvantages of Filing Bankruptcy

Making collectors disappear can feel like a dream come true. But there are downsides to filing for bankruptcy. Except in rare cases, it doesn’t clear mortgage debt, student loans, taxes, criminal fines, criminal restitution awards, alimony, or child support.  Also, you can lose nonexempt property because the court may order it to be sold.

Declaring bankruptcy may affect your credit score.  Once you file bankruptcy, the national credit reporting agencies are required to show it on your credit report.  A chapter 7 bankruptcy remains on your credit report for 10 years and a chapter 13 shows up for 7 years.  Generally, however, a bankruptcy improves your credit score; your debt to income ratio is better, and you can't file another bankruptcy for many years.  Most of my clients report receiving numerous credit solicitations from credit card companies and car financing companies soon after filing bankruptcy.

Having a bankruptcy on your credit report can hurt your ability to qualify for future loans; generally mortgage loans (at least at the most desirable interest rates) must wait a couple of years after a bankruptcy.  Not only that, your bankruptcy record can be used against you when being evaluated as potential customer, tenant, or employee, which can lead to raising your insurance rates, increasing your security deposits, denying your rental application, or turning you down for employment.

When To File Bankruptcy

There are alternatives to filing bankruptcy.  You can look at credit counseling, financial coaching, negotiating with creditors, credit card consolidation, loan modification, and loan refinancing.  Each of these options has its own set of disadvantages, however, so be sure you are fully informed before undertaking any of these strategies.

Common factors causing bankruptcy are:

·         Job loss or business failure;

·        delinquent taxes;

·        a home that is in foreclosure;

·        wages that are being garnished; and

·        pending lawsuits for delinquent bills.

 Everyone’s situation is different. When dealing with serious, long-term financial problems, remember to seek professional help to carefully evaluate your options.

Judgment Proof

Some people aren't as vulnerable to debt collectors as other people.  If your income is a protected type of income, you may have less need of a bankruptcy than the average person.  For example creditors cannot garnish:

.          Social Security

.          Unemployment compensation

.          Pensions

.          Workers compensation

A creditor who sues you and wins gets a "Judgment".  They can use that judgment to garnish your salary or bank account.  But they can't garnish these protected types of income.  Ask your bankruptcy attorney for more information.