The question “Should I file bankruptcy?” is tricky to answer and often confusing. It can be a lifesaver if you’re over your head in debt with no clear way out. However, the pros and cons of filing bankruptcy should be weighed carefully. Knowing when to file, how to file, and even if you should file are very important. Here, we provide you with all you need to know.
What is bankruptcy?
Before jumping straight in to asking, “Should I declare bankruptcy?” you need to know exactly what bankruptcy is. While you might think that bankruptcy is a magical thing that makes debt go away, that isn’t the case. There are different kinds of bankruptcy, each with its own pros and cons.
The general definition is a system of laws under federal jurisdiction that relieves both persons and businesses from debt. It is designed to help people by giving them a chance to get their finances straightened out.
Filing for bankruptcy can be advantageous, because it makes it illegal for creditors to contact you, which means no harassing letters or phone calls. This gives you some room to breathe and get your finances in order.
There are three types of bankruptcy: chapter 7, chapter 11, and chapter 13 of the United States Code (Bankruptcy Code), although most individuals will file for chapter 7 or 13 bankruptcy.
- Liquidates all your non-exempt assets over a 3-6 month period
- Best option if you have unsecured debt (medical bills and credit cards)
- Qualify by taking the means test
- Usually the simplest and quickest form of bankruptcy
- For individuals, married couples, and corporations
- Less extreme than chapter 7
- You lose your assets
- Reorganizes your debt into a repayment plan with a cap on how much you repay
- Best option if you have an income
- Repayment takes, on average, between 3-5 years
Chapter 11 bankruptcy is usually avoided because there is no maximum on debt. This option is popular with businesses.
Should I declare bankruptcy?
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The easiest way to tell if you should be considering bankruptcy is if you owe more than you can pay. You should consider bankruptcy if:
- You screen your phone calls to make sure it isn’t a debt collector
- You make the minimum payments on your credit cards but use them to pay for everything
- You don’t know how much you actually owe (and are afraid to find out)
- You are considering or going through the process of consolidating your debt
- You are facing foreclosures
If two or more of these apply to you, bankruptcy is something you should consider. If all of them apply to you, the question is probably when to file for bankruptcy.
When should I file for bankruptcy?
If you can’t pay all your bills and the amount you owe is more than you can possibly pay, even after a few years of dedicated payments, you might be out of options. When to file bankruptcy is difficult to answer because it varies by state. Seeking professional advice from an attorney or credit counseling service is the best way to know if you should declare bankruptcy.
Unfortunately, attorneys aren’t cheap. Still, it might be the only way to know if you absolutely have to file bankruptcy. There are some firms that offer free consultations, which you may want to look in to. There are also non-profit credit counseling services that may be willing to help you. Check around your state to find out what options are available for you. Before you go straight to filing for bankruptcy and trying to figure out when to declare bankruptcy, it is important to know what exactly you’re getting when you file.
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What are the advantages of filing for bankruptcy?
The most obvious advantage is that filing bankruptcy forces collectors to leave you alone. Also known as an “automatic stay,” creditors are not allowed to contact you in any way, including calling, letters, or showing up in person. If you decide to hire an attorney, creditors have to contact your attorney, not you. This can be a great relief, especially if you have multiple creditors. They can also help decide when you should file bankruptcy.
An advantage when filing chapter 7 is that most of your debts will be erased. This can mean a fresh start, debt-free. Chapter 13 is a bit different, because you still have to pay back your debts through a payment plan. However, at the end of the plan, if there is debt left unpaid, it will be discharged. There is an added benefit of having more time to pay it back and at a reasonable rate. Nonetheless, it is important to be care when deciding when to declare bankruptcy.
For getting rid of debt and getting collection agencies off your back, chapter 7 or 13 is the quickest way to go.
Now, you might be thinking this is perfect, but there are some disadvantages to declaring bankruptcy. As with many things in life, the drawbacks can outweigh the benefits, which need to be considered before deciding when to go bankrupt.
What are the disadvantages to filing bankruptcy?
Not all of your debt will be erased. You’ll still owe money for things like taxes, alimony, mortgages, student loans, and child support. That is a major downside when deciding “Should I file for bankruptcy?” If those are the only debts you have, the only real help you’ll get is under chapter 13, in the form of a repayment plan. You might be able to swing it so that you owe a bit less, but you’ll still have to pay a majority of the debt.
It goes on your credit score, for up to and sometimes longer than 10 years. If you are considering bankruptcy, your credit score may already be terrible; however, bankruptcy can still have a ripple effect on the rest of your life. Anything attached to your credit score is going to suffer. It is better in the long term to pay your debts without filing—more expensive, perhaps, but still much better.
That is all well and good, but knowing when you should file for bankruptcy can be difficult. Knowing just when things are critical to the point of bankruptcy might not be clear. Finding out exactly what you have and what you owe is a strong indicator. If all of your assets are more than your debt, bankruptcy may not be necessary. There are other measures that can be taken to avoid bankruptcy, while still getting to a good place financially.
Is there an alternative to bankruptcy?
If the main reason you want to file bankruptcy is to stop creditors from harassing you, there are alternative ways to get them to stop. Bankruptcy is a serious legal action with consequences, like the fact that it will stay on your credit score for 10 years or more. This can make getting a loan harder and can even keep you from getting a job. It may even raise your insurance premiums. Take some time to consider these alternatives.
There are federal and state laws that protect you from debt collectors’ harassment. Get some counseling and find out what creditors are and aren’t allowed to do. Another option is to try and negotiate with your collectors. Working out a payment schedule with creditors is basically the same as filing Chapter 13 bankruptcy, which would mean you never need to decide when to file for bankruptcy. It is in your creditors’ best interest to work with you, and if you have some assets or income, they may be willing to take a lower amount than what you owe.
Lastly, you can try getting credit counseling from an agency. This is great if you need some advice about your options for avoiding bankruptcy or if you don’t want to deal with creditors. They are a lot like hiring an attorney and can help you decide when to declare bankruptcy. They can help you come up with a plan for repaying your creditors and avoiding bankruptcy. Even if you end up filing for bankruptcy, at least you tried all other alternatives first. If all else fails, then you should file for bankruptcy.
How do I declare bankruptcy?
So you have answered the questions of whether you should file for bankruptcy, but simply saying it doesn’t count. You have to actually file paperwork, and there is an approval process. The first thing you will have to do is take the means test. This test tells the court what your financial position is and if you really need to file for bankruptcy. You have to know income and expenses, as well as a slew of other information about your finances.
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Once you have decided when you should file bankruptcy, you then have to actually file for bankruptcy. This means lots of forms will need to be filled out; someone does actually check all of this information to make sure it is accurate. This is where an attorney can be a big help, because they know exactly what goes where and what forms apply to you. Filing paperwork incorrectly can mean extra court dates, missed work, and a lot of frustration. It is worth the money to get legal help, if possible.
Anyone who is filing for bankruptcy has to get credit counseling and debtor education. You receive mandatory credit counseling before you file (to make sure you need to do so), and you get mandatory debtor education after you file. They are there to make sure you have accurately answered the question “Should I declare bankruptcy?” They are there to make sure you get out of debt and stay out of it. Can I be denied bankruptcy?
The short answer is yes, you can be denied. If you are denied, you will have to deal with paying the entirety of your debt on your own. There are ways to minimize the chances of being denied, including being very careful when you ask yourself, “Should I go bankrupt?”
Do not attempt to defraud the system. Trying to hide things is always a bad idea, but in this case, it is the worst thing you can do. Any assets you’ve hidden will come to light, and when they do, they will be seized and you will still have the same amount of debt. You also shouldn’t try to keep information hidden. When you should file for bankruptcy needs to be decided honestly. Being as upfront as possible on paper will make the process less painful and will ensure that you have the best chance of being approved.
You should also do everything the courts tell you to. Even after you are approved, if you don’t follow the rules, it can all be reversed. This will leave you in a worse position, with in legal trouble and attorney fees on top of your debt.
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I heard this about bankruptcy, is it true?
One of the biggest misconceptions is that you don’t need to hire legal representation. This is completely false. There are so many things that go into filing bankruptcy and you need to have to be able to do it right, or it will only cause more problems with the court. Having a good attorney can take the guess work out of the equation, minimize the chance of getting rejected, and help you figure out when to declare bankruptcy. If you can’t afford an attorney after you have filed, you can get one for free.
Some people might think that you can max out your credit cards right before you file and you won’t have to pay it back. This is not only untrue, but it is actually considered fraud by the courts and will get you into even more trouble. When deciding when you should file for bankruptcy, thinking about how much you can get away with is a bad idea. Similarly, giving away all of your assets to friends and family is also considered fraud. All you will do is hurt yourself and your chances of becoming financially stable again.
Bankruptcy also does not permanently ruin your credit. It may show up on your credit score for 10 years, but you can still work toward fixing it before then. Making payments on time and showing your financial reliability can minimize the effect it has on your credit score. You have to start working toward it even before you file and maintain it after you file. And that is how you answer the question “Should I file for bankruptcy?”
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