How to Determine If Bankruptcy Is the Right Choice for You

Making the Choice

If you are overwhelmed with debt, receiving constant phone calls from collection agencies and overdue notices in the mail, and perhaps being threatened with garnishment of wages or foreclosure on your home- it’s time to take an honest look at your financial situation and determine the best course of action.

You have every legal right to file for bankruptcy. But it is not something you should rush into without first evaluating your own particular financial position. Bankruptcy can be an effective and useful means by which you can either eliminate all or most of your outstanding debt, or have it restructured in a way that allows you to pay it off over a certain number of years (usually three to five).
Bankruptcy can provide you with a fresh financial start, but it isn’t the answer to every monetary problem. There are some important things to consider when deciding whether bankruptcy is the right choice for you.

First, you need to understand what bankruptcy can and cannot do. Here are some things bankruptcy can do:

  1. It can stop the foreclosure process on your home. It allows you time to catch up on any missed payments.
  2. It can stop wage garnishments by your creditors.
  3. It can absolve you from legally having to pay most or all of your debts. Your debts are considered “discharged” when your bankruptcy is finalized through the Court.
  4. Creditors are no longer allowed to contact you about your debt- this means no telephone calls and no written notices.
  5. It can stop repossession of a car or other personal property.

What a bankruptcy cannot do:

  1. It cannot eliminate certain secured debt- such as a home mortgage or car loan. You can negotiate with these creditors regarding a timely payment schedule, but these debts will not be discharged. If you intend to keep the property (home or car), you have to continue to make payments.
  2. Any debts you incur after the bankruptcy are not covered. You are liable for all new debt.
  3. Certain types of debt are never discharged. For example: alimony, child support, student loans, and any unpaid Federal or State taxes cannot be eliminated by bankruptcy.

There are two types of bankruptcy which are available to you. The first is a Chapter 7 bankruptcy. In this case, all debts which are not secured and are not disallowed from discharge are canceled. You may retain any secured property, such as a home or car, as long as you remain current on your payments.

The other option is called a Chapter 13 bankruptcy. In this instance, your debt is not eliminated, but rather reorganized to allow you to make reasonable monthly payments over a period of 3-5 years. Again, this type of bankruptcy allows you to keep valuable property such as your home or car but only if you continue making timely payments.

Your personal financial situation is what determines which type of bankruptcy you are qualified to take. Considerations are your overall outstanding debt (loans, credit cards, etc.) in relation to your annual income. You may have an enormous amount of debt, but also a very high income level. Also, if your debtis too high and income too low, you may not be able to file Chapter 13. You have to show supporting evidence that you will be able to make the payments offered in the reorganization plan.

Be sure the outstanding debts you have are allowed under a bankruptcy filing. There’s no use in filing for bankruptcy if it will offer you little or protection from your creditors.

You need to consider what will happen to your home if you file for bankruptcy. If you are behind in your payments, decide if having your other debt eliminated through bankruptcy will make it easier to bring your mortgage payments current and keep them that way. Given the current mortgage crisis, you may be one of the many homeowners who now have a monthly mortgage payment that has suddenly ballooned into a much larger sum. Or perhaps your house has a market value well below your mortgage amount. These are things to keep in mind when making your decision.

With thoughtful planning and an honest appraisal of your own personal situation, bankruptcy can be one of a number of different options available to you to help ease your financial burden. Explore all the possibilities and determine the best one for you.