Millions of people file for bankruptcy in the U.S. every year due to the simple fact that their income is not enough to cover all their expenses. Overwhelming debt is exactly that – overwhelming! For many, the thought of a fresh financial start is just too tempting to pass up and claiming bankruptcy looks like a great way to clear the slate of any debt. But is it?
If you are considering filing bankruptcy there are a few things that you should think about first to ensure that it is the right decision for you. If you’ve searched “should I file for bankruptcy test,” the following article is worth reading.
First of all, you should clearly understand the difference between the two options of filing a personal bankruptcy claim under Chapter 7 or Chapter 13. It is always best to consult a qualified bankruptcy attorney for detailed answers to your questions, but the basics are as follows:
• Chapter 7 – is the traditional notion of bankruptcy that involves the liquidation of your assets. It is the best choice for people who have a large amount of dischargeable debt and not a lot of property that they may lose during the process, but it is only an option for those who prove their eligibility by passing the Means Test.
• Chapter 13 – involves consolidating any outstanding debt and repaying a portion of it over a period of 3 to 5 years. In order to do this, you must be able to prove that you have sufficient disposable income to make monthly payments. It is a good option for people who have debt on items that they consider to be indispensable but you will not be eligible if you have more than $270,000 in unsecured debts and $800,000 in secured debts.
One crucial step is to consider what type of debts you have as this will help you decide which chapter filing would be most beneficial for you. Unsecured debt like credit card and medical debt are quite easily discharged under Chapter 7, whereas student loans, child support and alimony, and fines for breaking the law are not, and a Chapter 13 repayment plan would be better in that case. If you have used friends or relatives as co-signers, keep in mind that they will be protected under Chapter 13 as you will eventually be repaying a portion or the debt, but under Chapter 7 they will need to pay it off for you. This could lead to a very difficult situation.
Chapter 13 can be a costly process as you will need to pay the fees of a trustee who will be responsible for collecting payment and distributing it to your creditors in order to pay off a portion of your debts. If you choose to take the more traditional approach to bankruptcy and opt to file under Chapter 7, your first step will be to take the Means Test (Form 22A) to determine eligibility. This takes into consideration your income, expenses and assets, and is designed to prevent those with a higher income from filing under Chapter 7 instead of Chapter 13. The court will look at your income over the past 6 months to determine if you are eligible. If your income is too high, you will have the choice of filing under Chapter 13 or, if you have been recently laid off or received a pay reduction, you could wait a few months until your average income over the 6-month period is lower.
Waiting to file for bankruptcy may be a necessity, but it could also be a good idea. Bankruptcy discharges debts in existence at the date of filing, but not those that are accrued afterwards; therefore, if you expect to incur additional expenses, such as future medical bills if surgery is already scheduled, it may be best to wait until after then to file for bankruptcy. Also, if you are expecting to receive some money, such as a tax refund, it may be a good idea to receive it and purchase exempt items such as a vehicle, a burial plot, household goods, or other common necessities, rather than having it taken to repay your debts. However, delaying your bankruptcy filing may not be a good idea if creditors are about to repossess your car or foreclose your mortgage or you are simply being harassed.
Finally, you need to be clear as to what the consequences of going bankrupt really are. It may seem like an easy solution to your current financial difficulties but bankruptcy can have a negative effect on your future as bankruptcy stays on your credit record for 7 – 10 years, making it difficult to get a promotion or new job, rent or buy real estate, and be approved for future credit.
Declaring yourself bankrupt can be a way to wipe your financial slate clean and erase all your past debts, but that is only if you qualify and if your debt is able to easily be discharged. Since it does also affect your credit record for a long time, it might be best to consider some alternatives, such as:
• Stop harassment from creditors by taking advantage of federal and state debt collection laws.
• Negotiate with creditors for extra time, reduced interest, or a cancellation of fees.
• Consult a non-profit credit or debt counselling agency
Take the time to talk to a qualified bankruptcy attorney will help you make an informed decision about whether bankruptcy is right for you. Taking our free bankruptcy evaluation is the first step.