Should You File Bankruptcy?

Many people who are drowning in debt and unpaid bills find that bankruptcy can provide a way out and a fresh start.  But bankruptcy is not for everyone.  Your individual circumstances will determine whether bankruptcy is right for you.  It is not a decision to be taken lightly.  Yes, bankruptcy can provide you with a fresh financial start.  But it will also have a negative impact on your credit, and you might find it difficult to obtain credit at reasonable rates after filing bankruptcy.  There are many factors you should consider before filing.

Will a Bankruptcy Eliminate Your Debt?

Before you file a bankruptcy case, you should learn whether the debt you owe will be discharged in the bankruptcy.  Certain types of debt will not be discharged.  These debts are called priority obligations.  They include debts for unpaid income taxes, unpaid child support or spousal support (alimony), and criminal fines and penalties.  Certain other debts, while not considered priority debts, are almost impossible to discharge in a bankruptcy.  Specifically, student loans.  Although student loans can technically be discharged in a bankruptcy, it is extremely difficult to get such loans discharged, and requires an adversary proceeding.  If student loans or priority obligations are your main source of debt, bankruptcy is probably not for you, since such debt will not be discharged in a bankruptcy.

If you fall in this category, it might be worthwhile to negotiate with your creditors.  Many creditors are willing to settle or consolidate your debts to make repayment more manageable.  If you can negotiate with your creditors and resolve your debts, you may not need to file for bankrtupcy.

Chapter 7 or 13?

Both Chapter 7 and Chapter 13 have eligibility requirements.  For a Chapter 7, your income must be low enough to pass the means test.  A good measure for this is your state's median income.  If your income is below the median income for your state, you will qualify for a Chapter 7.  If it is above the median income, you probably won't qualify for a Chapter 7.

For a Chapter 13, the amount of your debt cannot exceed certain limits, and your income must be sufficient to fund a repayment plan.  Currently, if your secured debts exceed $1,149,525, you do not qualify for a Chapter 13.  If your unsecured debts exceed $383,175, you do not qualify for a Chapter 13.  (A secured debt is one in which some property is pledged as collateral for the loan, like a car or a house.)

There are cases in which you may qualify for both forms of bankruptcy.  Which you choose depends on several factors.  The biggest factor is whether you own non-exempt property that would be seized and liquidated in a Chapter 7.  But there may be other factors which influence your decision, such as what kinds of debts you owe, your income and expenses, and what you hope to achieve through a bankruptcy.