When you have fallen behind on your payments and are facing mounting debts, your may find yourself considering bankruptcy. Filing for bankruptcy can be a useful way to get a new start, but it isn't right for everyone. Find out when you shouldn't file for bankruptcy and what other options you may have.
In this blog post, I will discuss reasons a person shouldn’t file for bankruptcy. I will discuss different situations in which a non-bankruptcy option will lead to a better result. I will explain how debt restructuring and other strategies can be used to avoid bankruptcy and manage a family’s debt.
The main benefit of a Chapter 7 bankruptcy is that it discharges debt, forgiving your duty to pay the debt. But not every debt is dischargeable. While a Chapter 7 bankruptcy will erase credit card payments, medical debt, unpaid rent or mortgage payments, and most other debts, you will still usually be responsible to pay:
You will also be required to continue to pay long-term secured loans, like mortgages after the bankruptcy is complete, though the past due payments may be forgiven. If most of your debts fall into these non-dischargeable categories, you shouldn't file for bankruptcy.
The bankruptcy court also has a 60-day look-back period. If you used credit to purchase large luxury items or services, or have taken out any new loans or cash advances, those debts could be held non-dischargeable as well. In those cases, you shouldn't file for bankruptcy until the look-back period has expired.
Sometimes you know in advance when you will need to take on new debt. If you will need to take out new student loans for the next semester or anticipate replacing a vehicle, you should not file for bankruptcy. When you file a Chapter 13 bankruptcy, you will not be able to take on new debt during the 3 to 5 years covered by your payment plan.
Even if you file a Chapter 7 bankruptcy, it will negatively affect your credit score and make it harder to qualify for new loans or credit. A bankruptcy can drop your credit by 160 to 200 points and it stays on your credit score for 10 years. By the time you decide to file for bankruptcy, your credit score may already be poor, and a bankruptcy can actually improve your credit over time. But if you know you will need to take on new debt soon, you shouldn't file for bankruptcy until that is done.
Filing a bankruptcy isn't free. You should expect to use all your non-exempt assets to partially pay off your creditors. In a Chapter 7 bankruptcy, it is the job of the bankruptcy trustee to distribute your assets among all your creditors. You can protect many of those assets under Chapter 13, but only if you qualify. If you have personal assets you need to protect, including some inheritance assets, you shouldn't file a Chapter 7 bankruptcy.
Just because you shouldn't file for bankruptcy doesn't mean you don't have options to reduce your debt and stop creditor calls. You may be able to consolidate your debt using a debt management plan or home equity loan. If you qualify, you may be able to take on a single new debt at a lower interest rate and then pay off your other, higher-interest debts. This can stop collections calls, late fees, and penalties. It can also cause more of your money go toward the principle, paying your debt down faster.
Even if you don't file for bankruptcy, an attorney can help you negotiate with your existing creditors (or their collections agencies) to settle outstanding claims, resolve collections lawsuits, and arrange for easier payment terms. There may also be problems with the collectors' claims. If that happens, you may be able to avoid collection entirely. By working with your creditors you can put a stop (or at least) a hold on collections efforts, and make it easier for you to catch up on your obligations.
Often, a debtor's problems can be resolved by learning better money management strategies. Using credit counseling and budgeting, you may be able to reduce expenses, find new income sources, and sell assets to pay down your debt. This will help you learn new strategies that will reduce your debt now and help you manage your finances in years to come. However you should generally avoid paying credit counseling firms and debt resolution firms because they often promise results that they cannot deliver. Instead, consider free online videos or non-profit classes about money management and debt repayment strategies, that can help you learn how to handle your money concerns on your own.
At John A. Steinberger & Associates, P.C., we know that not every debt problem requires a bankruptcy. We are a full-service bankruptcy law firm in Southeast MI, serving debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We carefully evaluate our clients' circumstances, and discuss which strategies will be best for them, whether or not they include bankruptcy. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.