Before filing bankruptcy, many factors should be considered to determine if bankruptcy is the right solution for you. This post discusses some of the bigger factors to considered but it is in no way an exhaustive list of factors. Speak with a bankruptcy attorney to learn about other factors that may affect your bankruptcy before you file.
Impact on Credit
One factor that almost everyone is concerned with is how bankruptcy will affect their credit. The simple answer is that a bankruptcy will negatively impact your credit and will stay on your credit report for 10 years. What does this mean? It means that it will be more difficult for you to get a loan for a house, car, or business. If you do obtain a loan or line of credit, it will usually be at a higher interest rate. However, this shouldn’t be a deterrent from filing. If you are considering filing bankruptcy, more than likely your credit is already less than perfect or on its way to being less than perfect. Many debtors who choose not to file bankruptcy struggle for several years to stay on top of their debt or preserve their credit only to end up filing bankruptcy anyway. They could have been well on their way to better credit if they had filed bankruptcy several years earlier. Even though bankruptcy will negatively impact your credit, you can immediately begin restoring your credit once you file.
Debt vs. Income
Another factor to consider is the size of your debt versus your income. If your income allows you to meet your basic needs and pay off your debts in a timely manner, you probably aren’t reading this post. If on the other hand you are missing payments and falling behind on your debt, you need to evaluate whether or not your income will allow you to get your debt under control. It’s possible a few changes to your budget will allow you to reign in your debt within a reasonable period of time. If that’s the case, bankruptcy may not be the best solution for you. However, if your debt obligation overshadows your income to the point that you’re not making any headway and you’re already living under self-imposed austerity measures, then bankruptcy may be the perfect solution for you. You shouldn’t struggle month after month with the burden of a debt you cannot repay. If this is your situation, then you’re just throwing away money until you file bankruptcy or find another solution to your financial woes.
Type of Debt
The type of debt you possess should also be factored when considering bankruptcy. Your debt will fall into one of several categories of debt. Which category your debt falls into will determine whether or not the debt survives the bankruptcy. If a debt survives bankruptcy, you will still be liable to pay the creditor of that debt what is owed once the bankruptcy is finalized.
Filing bankruptcy will have little to no effect on certain debts. For instance, secured debts are generally not affected by bankruptcy. Secured debts are debts secured by collateral. Typical examples of secured debts are home mortgages and car loans. Because the debt is collateralized, the creditor has rights to the collateral if the debtor defaults on the debt.
Debts That May Survive Bankruptcy
Debts that may survive bankruptcy include support obligations for an ex-spouse or child, certain tax debts, fines for violating a law, personal injury debt arising from driving intoxicated, and student loans. Some debts, such as support obligations, will almost always survive bankruptcy. Others debts, such as student loans, may be discharged in bankruptcy but with considerable difficulty.
Unsecured debts almost never survive bankruptcy and are typically discharged. Unlike secured debts, unsecured debts are not secured by collateral. Typical types of unsecured debts include credit cards, medical bills, judgments, and personal loans. Once these debts are discharged through bankruptcy, there is no longer any obligation to repay them.
It is possible you may not even need to file bankruptcy. Depending on your circumstances, a creditor may not be able to collect their debt from you regardless of whether or not you file bankruptcy. If you do not own anything that can be seized and if your income cannot be garnished, you are considered judgment proof. What does it mean to be judgment proof? It means that even though a creditor can get a judgment against you, there is nothing the creditor can do to collect on that judgment except wait until your situation improves. The judgment remains uncollectable until it expires. That being said, you may still want to consider filing bankruptcy. Filing bankruptcy will stop creditors from harassing you. It will also eliminate the judgment so you don’t have to worry about it when things begin to improve.
Again, these are only a few of the factors for you to take into consideration when deciding whether or not you should file bankruptcy. To learn more about these and other factors that may affect you, set up a consultation with a local bankruptcy attorney.