Bankruptcy: To File or Not to File?


Bankruptcy. A creditor detests it, until in need of its protection. A debtor avoids it, until often too late. In a way, bankruptcy is much like facing death. It is so easy to avoid planning for “what dreams may come” until one unexpectedly stands at the threshold of passing “gentl[y] into that good night.” Yet, at that precise moment, all the doubts, fears, and uncertainties that one may hold seem to concentrate into an amorphous yet densely heavy fog of impending consequence. For in bankruptcy, judgment day—in a strictly legal sense—may literally arrive ever so unpredictably upon the death of a fleeting former lifestyle.

Wouldn’t it be wonderful if you had a plan for the unexpected uncertainties of life, specifically financial uncertainties? Whether you are a business owner, an entrepreneur, a board member, an officer, a shareholder, or a plain vanilla consumer debtor, the time to learn about bankruptcy and create a plan for such financial uncertainties is now; not when peering down the precipice of misfortune. To help you in your journey, this article will address some important factors to consider in determining whether or when to pull the trigger and file bankruptcy. Just remember to aim the barrel at the debts; not the debtor.

Of course, the precursor to knowing when to file is knowing which chapter of the bankruptcy code you wish to utilize. This article is designed to provide factors that specifically apply to Chapter 7 filings, although they may be equally applicable to other chapters.

How do I know that it is time to file bankruptcy?

The key to knowing when the timing is right depends on your overall goals regarding your core purpose for filing bankruptcy. Some debtors merely want peace of mind, while others want a particular outcome like quashing an existing garnishment. Regardless, the following factors should help you determine if the time is right for you:

Exemption Considerations:

Many debtors contemplating bankruptcy are often “judgment proof.” Are you? In a general sense, this term means that all property in a debtor’s possession is exempt from the collection efforts of a creditor or debt collector attempting to seize the property to satisfy a debt. Some example of judgment proof debtors are persons that live entirely on exempt sources of income like social security or SSI. Other examples include unemployed individuals with possessions that are exempt from seizure under a federal or state statutory exemption such as household goods, qualified retirement accounts, tools of the trade, or a specific amount of equity in a home or an automobile. As state exemption laws often vary significantly, anyone considering filing bankruptcy should contact a local attorney to discuss his or her potential case in detail. Ultimately, an individual that is judgment proof is already protected by the law and generally does not have a need to file bankruptcy. Then again, some judgment proof debtors may still want to file bankruptcy for the sole purpose of providing peace of mind.

Employment Considerations:

Are you currently unemployed or underemployed? If you are unemployed, consider the following: (1) there are generally no wages eligible for a creditor or debt collector to garnish; (2) you will likely continue to accrue debt until you are employed; (3) potential employers will often look unfavorably upon a recent bankruptcy filing if discovered within the application process; and (4) the Chapter 7 means test considers your actual monthly wages for the prior six months before a petition is filed.

The first factor indicates that it is often more difficult for a creditor or debt collector to collect during a period of unemployment, even in the event of receiving unemployment benefits. The second and third factors indicate that you seriously want to consider the timing of filing bankruptcy, as the fourth factor indicates that you usually have a few months to acclimate to your new job and still qualify to file a Chapter 7 petition. Thus, it’s often wise to wait to file bankruptcy until you are in your second or third month of employment at a new job.

If you are underemployed, consider the impact that a bankruptcy filing may have in the application process while looking for better employment. Although federal law prohibits a government or private employer from firing you if you declare bankruptcy, there is often little protection against a potential employer considering your bankruptcy in their decision-making process regarding whether or not to offer you a job.

Consequently, long term considerations regarding employment should be taken seriously when contemplating potential short term benefits offered by bankruptcy.

Student Loan Considerations:

Are you thinking about going to graduate school? Consider the impact that bankruptcy may have on acquiring additional student loans. Although a prior bankruptcy generally should not affect whether you may receive a new federal loan or grant, it will almost definitely affect your ability to qualify for a private loan or a federal PLUS loan, which loans are often needed for graduate studies.

Medical Considerations:

One of the top reasons for filing a consumer bankruptcy is medical bills. Many debtors feel compelled to declare bankruptcy upon receiving a demand to pay past due medical bills. Many debtors, however, fail to take into consideration whether or not they have completed their medical treatments. It makes little sense to declare bankruptcy for $100,000 in outstanding medical bills today when you are still receiving treatments that will amount to another $50,000 in medical costs tomorrow. Unless, there is an active garnishment that is making it impossible to pay for necessities, it is often best to wait until you have fully completed your medical treatments prior to filing bankruptcy.

Also, many debtors—particularly those in rural communities—often do not fully consider the effect of discharging medical debt owed to the sole local doctor or small group of local doctors that service the community. How will including these debts in bankruptcy affect that important doctor-patient relationship? Is there a way to negotiate a series of payments? While no one likes the idea of a rural doctor refusing to service a patient based on that patient’s prior bankruptcy; it could happen. While there may be matters to litigate in such a situation, the reality is that many debtors don’t have the resources, energy, or emotional strength to endure an absence of medical treatment until an outcome is reached by way of law suit or settlement; an event that could take years. Then again, relocation may be the solution.

Future Credit Considerations:

Your credit score is quickly becoming one of the most important factors in your day to day life. It affects whether you can: (1) rent or own a home, condominium, or apartment: (2) lease or purchase an automobile; (3) afford monthly payments based on the available interest rate; (4) obtain employment (i.e., many employers now check your credit score prior to making a hiring decision regarding your application of employment); (5) whether you are eligible for a promotion if serving in the military; 6) whether you may work in a particular industry (e.g., the financial sector); (7) whether you qualify for financing in department stores; (8) whether you qualify for consumer-friendly credit cards (e.g., the ones that give you rewards and cashback options); (9) whether you can qualify for certain student loans to finance higher education; (10) whether you can qualify to help a dependent qualify for student loans, etc.

Declaring bankruptcy—the simple act of merely filing a bankruptcy petition—may remain on your credit reports for up to 10 years! This does not require that you receive a discharge in a bankruptcy; only that you file a bankruptcy petition. What other decision can have such a negative consequence on so many important life decisions over a 10 year time frame? Consequently, it is imperative to have a plan to know whether and when to file. With that said, bankruptcy may not negatively impact your score as much as anticipated if your score is already very low due to frequent missed payments, collections, and judgments.

For those individuals who are already suffering the negative effects of having filed for bankruptcy, Lexington Law Firm may be able to assist by ensuring that you have a fair and accurate credit profile.

Immigration Status Considerations:

Although legal immigrants and even undocumented immigrants may technically file bankruptcy as long as they have a valid social security number or an individual taxpayer identification number (ITIN), they should recognize that all statements made within the petition are filed under penalty of perjury. In addition, all filings are readily accessible by the United States Department of Justice. Consequently, any immigrant should consult with an experienced immigration attorney prior to filing bankruptcy.

Standard of Living and Lease Agreement Considerations:

Remember that a Chapter 7 bankruptcy, in particular, only protects exempt assets. All other possessions are subject to sale by trustee. How will this affect your standard of living? Is there a way to handle a specific asset or group of assets to avoid having to declare bankruptcy and potentially forfeit all non-exempt property? This is a very important question to answer prior to making a final decision on whether and when to file bankruptcy.

In addition, it is important to consider the effects that bankruptcy may have on your ability to enter into a new lease agreement with a potential landlord after having recently declared bankruptcy. Landlords may evaluate your ability to pay the lease prior to agreeing to allow you to rent the space. This means that you may be denied an apartment if the landlord determines that you do not have the ability to pay which may include information regarding a recently filed bankruptcy petition. Consequently, it is wise, if possible, to file bankruptcy after having already entered into a lease agreement with a landlord. By doing so, you can generally exclude the lease agreement from the bankruptcy by informing the court and by continuing to make regular monthly payments to the landlord as initially agreed upon. Again, it is essential to discuss this option in detail with a local attorney prior to filing.

Ultimately, only you can decide whether or when to file bankruptcy; so make it an informed decision:

So, should you file bankruptcy? If so, when should you file? That will depend largely on what your overall objectives are and what your current life situation is. Are you judgement proof? Are your assets exempt from collection efforts? Are you unemployed or underemployed? Are you considering requesting private or PLUS student loans in the near future? Do you have ongoing medical needs? How will bankruptcy impact your standard of living and your ability to maintain or enter into a new lease agreement? Although bankruptcy was designed to provide the unfortunate debtor with a “fresh start,” the timing of filing bankruptcy is critical to the ultimate success of receiving a fresh start. Although uncertainty is a part of life, the decision to file bankruptcy is quite similar to pulling a trigger in that it is nearly impossible to recall discharged ammunition; the effects of which have serious and reverberating consequences.

In the end, however, bankruptcy may be the only option to allow you to move forward financially. That is why it is essential to have a personal financial plan regarding how and when you will know that bankruptcy is the right decision. When that day arrives, make sure that the timing is right to ensure that your “fresh start” is what you expected it to be.

Mark Andrus is an associate attorney for Lexington Law Firm. He received his BA in English with a minor in Business Management at Brigham Young University and his Juris Doctorate from Santa Clara University. Mr. Andrus has served as a judicial extern for the Honorable Arthur Weissbrodt of the United States Bankruptcy Court for the Northern District of California and as a technical editor for the Santa Clara Law Review. He currently serves on the Utah State Bar Association’s Pro Bono Committee for the Third District. His areas of practice include consumer, bankruptcy, and family law litigation and corporate compliance with federal and state consumer laws. Mr. Andrus is licensed to practice law in Utah, California, Arizona, Montana, New Hampshire and Arkansas.