Determinations to Make Before You File Bankruptcy
By Space Coast Daily // January 28, 2021
No one ever plans to file bankruptcy and not everyone with debt issues should file for bankruptcy. If you are considering bankruptcy, there are different determinations you will have to make.
Types of Bankruptcy
You will have to decide between filing Chapter 7 and Chapter 13 bankruptcy. Bankruptcy under Chapter 7 uses your nonexempt property, or at least some of it, in order to pay off your creditors. You will be allowed to keep some of your property and have the remaining debt cleared out.
This can be a good option if you have a few nonexempt assets, a lot of unsecured debt and no income or very little. However, even if your car and home are exempt, you might still lose them if you aren’t able to keep up with the car payments or the mortgage.
With a Chapter 13 bankruptcy, you are going to create a payment plan for debts that can be managed on your income. Chapter 13 bankruptcy can be a good idea if you have enough income to cover basic living expenses, want to avoid repossession of your vehicle or avoid foreclosure, and just need some help in order to catch up on debts.
This is the option that is typically used by people who are employed but have acquired financial problems caused by things such as medical expenses, a recent job layoff, or divorce. There are certain income requirements you have to meet in order to file Chapter 7 bankruptcy and you may only be allowed to file Chapter 13 bankruptcy.
Reasons to File for Bankruptcy
The main reason to file for bankruptcy is the automatic stay. An automatic stay means once creditors are notified of the bankruptcy filing, they need to stop trying to collect your debt. They are not allowed to mail any collection letters, call you, garnish wages, or pursue a lawsuit.
However, if you do have a mortgage, the holder may ask the court to lift this, so they are able to proceed with foreclosure, but it does tend to delay foreclosure for a bit.
There are some indications that let you know it’s a good time to file for bankruptcy. This includes your home going into foreclosure, your vehicle being repossessed, your landlord trying to evict you, your wages being garnished, having been unemployed with no benefits and with little savings, or if you are being sued for your debts.
When to File for Bankruptcy
If you are about to start a job that pays better, then you may earn too much money and won’t be able to file under Chapter 7.
In order to make this determination, the court uses your average monthly income for a six-month period before filing. Every month you delay is another month the higher pay increases your average income and then you may not get a chance to file under Chapter 7.
If you are expecting to get property in the future, this may also impact when you should file for bankruptcy. Your financial situation for bankruptcy is determined on the date you file.
If you incur debts or acquire property after this date, then it’s not usually a part of the process. If you think you could be getting assets from a divorce or an inheritance, then you need to file before you get it.
If you are going to be moving to a different state with less desirable exemptions, then you should file before you move. You must file for bankruptcy in the principal place of your residence.
There are also many reasons why you may want to delay filing for bankruptcy. Delay filing for bankruptcy if you are able to start a lower paying job since this can allow you to file under Chapter 7.
Similarly, you want to avoid filing for bankruptcy if you are moving to a state with more desirable exemptions. If you are expecting more debt, you also want to wait.
There are some short-term considerations for when to file. If you think you could be getting an income tax refund, you want to wait to get it so you can use it for the filing fee or an attorney. You should pay necessary bills before you file so bank accounts are at the lowest.
Reasons to Not File for Bankruptcy
When you file for bankruptcy, it will have a great impact on your credit score. Chapter 7 bankruptcies stay on your credit report for 10 years, while Chapter 13 stays on your report for seven years.
Your bankruptcy could be used to justify you being turned down for a job, denied an apartment, and having to pay higher insurance rates.
If you do have some income that allows you to pay down debts, even at a reduced monthly amount, then you may want to look at some other options, such as debt consolidation or negotiating with your creditors in order to get different loan terms.
How Much of Your Property Is Exempt?
Figuring out how much of your property is exempt is a key determination to make before you file for bankruptcy. Where you file is going to determine how much property you have.
The exemption system can be a bit complicated. Even though the bankruptcy code is a federal law, the law allows for you to take advantage of state laws regarding exempt property. In certain states, the bankruptcy code gives its own exemptions, so you need to choose between state and federal exemptions.
There are some exemptions with an unlimited amount, and some will have maximum values attached. In some cases, exemptions can be doubled for a married couple that files a joint bankruptcy.