Bankruptcy: To File or Not to File


Disclaimer: As trusted leaders in credit repair, Lexington Law Firm is a consumer advocacy firm with a focus on helping consumers repair their credit. Lexington Law does not practice other specific areas of law, and any information provided on this blog is strictly for informational purposes. Please consult with an attorney in your state to determine what may be applicable to your individual situation.

Bankruptcy. A creditor detests it, until in need of its protection. A debtor avoids it, until it’s often too late. It is so easy to avoid planning for a bankruptcy until you are suddenly faced with that difficult choice due to your credit situation. For in bankruptcy, judgment day — in a strictly legal sense — may literally arrive ever so unpredictably as the result of a fleeting former lifestyle. To help you in your journey, this article will address some important factors to consider in determining whether or not bankruptcy would be applicable to you.

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 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 Supplemental Security Income (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.

Employment Considerations

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

If you are underemployed, it’s a good idea to consider the impact 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 furthering your education at a college or university? Consider the impact bankruptcy may have on acquiring student loans, if needed. 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 are loans often needed for graduate studies.

Medical Considerations

One of the top reasons for filing 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.

Future Credit Considerations

Your credit scores are quickly becoming one of the most important factors in your day-to-day life. These scores affect whether you can many things, including the following:

  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 a version of your credit reports as part of the application process)
  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 certain types of credit cards (e.g., the ones that give you rewards and cash back 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 simply act of merely filing a bankruptcy petition — may remain on your credit reports for up to 10 years. With that said, bankruptcy may not negatively impact your scores as much as anticipated if your scores are already very low due to frequent missed payments, collections or 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.

Standard of Living & Lease Agreement Considerations

Remember, 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 sale 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.

Consequently, it is also 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.

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.

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.

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