Is Bankruptcy for Me?

Personal debt has become an epidemic in the United States.  In fact, 1 in 3 Americans will have a debt in collections this year.   While being a debtor is not uncommon, the effects of being buried in debt are severe.  Debt is a leading cause of divorce, depression and anxiety, and a top reason for lost hours of work and reported sick days.  In fact, debtors routinely become so affected by debt that it takes a physical toll and may be manifested as ulcers, heart attacks, muscle tension and migraine headaches.

Many debtors realize they need to address their financial future, but are unsure what to do.  Today, there are more options than ever to consider.  However, choosing the wrong strategy can leave you in a worse position.  One of the most powerful tools for debt recovery is filing a Chapter 7 personal bankruptcy.  Bankruptcy might be a good option for you, but there are a number of downsides that you should consider.

Chapter 7 bankruptcy is commonly referred to as a liquidation.  Essentially, for qualified debtors, most or all of your debts are discharged and any unprotected assets are forfeited to the court to repay the creditors.  However, in practice, it is common for a debtor to be able to protect all of their assets and effectively get a fresh start.

Chapter 7 is often good if you do not have assets that are not exempt, do not have a clear path to paying your debts, and have a poor credit score.  Chapter 7 can be effective because it is a way to get rid of large amounts of debt very quickly.  While it is true that declaring bankruptcy will have a negative impact on your credit score, the net impact on the credit score can be positive for some debtors.  This is because the bankruptcy is a one-time hit against your credit score.  If done appropriately, a bankruptcy debtor will begin good credit practices and work to restore their credit rating after filing bankruptcy.  Whereas if bankruptcy was never declared, the debtor will likely not be able to maintain his or her debts and the credit score will continue to decline indefinitely.

Some debtors, debt counselors and even attorneys have used the means test to determine whether a debtor should file a bankruptcy.  This is an incorrect and dangerous practice.  The means test is a required form that prevents some people from filing bankruptcy.  However, “passing” the bankruptcy test may mean that you are allowed, to file bankruptcy, but it doesn’t mean that it is a good idea. There are many reasons that debtors would not want to file a bankruptcy even if the means test does not prevent them from filing.  Chapter 7 is sometimes not appropriate if you have assets that are not exempt or entitled to be protected in a bankruptcy, only one or two creditors, have a relatively low amount of debt related to either your savings or your income, or can minimize impact to your credit score with another type of debt solution.

This article contains material of general interest and should not be construed as legal or financial advice or a legal opinion on any specific facts or circumstances.  This content may not be relied upon as personal, legal, or financial advice. This article does not include legal advice and does not create an attorney-client relationship.  If you need legal advice, please contact an attorney directly.