Decide If Bankruptcy Is Right for You
by Attorney Albin Renauer
Is bankruptcy a good idea or not? Here are some things to consider.
1. Learn about it. For individuals, there are two main kinds of bankruptcy:
- Chapter 7 -- a bankruptcy where many, if not all, of your debts are cancelled outright in a short three- to six-month process.
- Chapter 13 -- a bankruptcy where you use your income to make payments on your debts over the next three to five years.
2. Consider simpler alternatives. Things may not be as bad as you think. You may be "judgment proof" or you may have options you aren't aware of.
3. Make sure you are you eligible. You may be prevented from filing for Chapter 7 bankruptcy if you have enough income to repay your debts in a Chapter 13 plan. Who Can File for Chapter 7 Bankruptcy.) Or you may not qualify for Chapter 13 bankruptcy if your debts are too high or your income too low.
4. Learn which debts won't be cancelled. Some debts, like child support obligations, cannot be wiped out in bankruptcy.
5. Consider what will happen to your home. Bankruptcy won't relieve you of your obligation to pay your mortgage, but it might make your mortgage easier to pay by getting rid of other debts. If you have substantial equity in your home, you might lose it if you file for Chapter 7, depending on how generous the exemptions laws are that are available to you. If you file for Chapter 13, you can keep your home and pay off any mortgage arrears through your repayment plan.
6. Will you lose your car or other property? How much property you get to keep depends whether you've pledged the property as collateral for a debt, and on the "exemption" laws that are available in your state. If you file for Chapter 7, you might lose your car if you have substantial equity that isn't protected by your state's exemption laws.
7. Will your credit cards be paid off? Bankruptcy is good at wiping out most credit card debt and unsecured loans, unless you spent extravagantly or lied on your credit application.
8. Is your pension, IRA, or 401(k) safe? In most states, you will not lose pensions, retirement accounts, or life insurance in bankruptcy. If you have a pension, a 401(k), an IRA, or life insurance, find out what's protected in your state.
9. Will cosigners be stuck with your debt? If a friend or relative helped you get financing by cosigning a loan agreement, Chapter 13 bankruptcy will protect your cosigner, but Chapter 7 will stick them with any debt you don't pay.
10. Consider your personal life. Bankruptcy can be intrusive -- you have to disclose every last detail of your finances to the court, and other people may find out about your bankruptcy. In a Chapter 7 bankruptcy, you can have property taken away, or, under a Chapter 13 plan, you might spend three to five years having to ask permission to spend your own money .