When Should You Consider Filing Bankruptcy?

What is Bankruptcy?

It is a legal term for when a person or business can’t pay off their outstanding debts. You have to give a declaration that you are unable to reasonably make repayments!

The U.S. Constitution provides you the ability to relieve all or part of your debts when you are no longer able to meet obligations to your creditors.

Basically, you will find 2 major types of personal bankruptcies, applied to the consumers.

Let’s check them once!

Chapter 7 bankruptcy: It is often called as “liquidation bankruptcy”. That means many of your possessions will be sold to pay off your existing debts.

To qualify for Chapter 7 bankruptcy, you need to pass a means test. The test proves that your income is less than the median income for your family size in your state.

Passing the means test will give you a green signal to file a Chapter 7 bankruptcy! It will forgive most of your unsecured debts like medical debts, credit card debts, etc. You can expect to get a discharge by 60 to 90 days.

However, if you fail the means test, you can go for filing a Chapter 13 bankruptcy!

Chapter 13 bankruptcy: It is also known as “reorganization bankruptcy” or “wage earner’s bankruptcy”. In 2019, you are eligible to file a Chapter 13 bankruptcy if

● Your unsecured debts (credit cards, medical bills, etc.) are within the limit of $419,275.

● Your secured debts (home, car, property, etc.) aren’t more than $1,257,850.

If you qualify for the Chapter 13 bankruptcy, you pay off all or part of your debts through 3 to 5 years repayment plan.

You and your bankruptcy estate trustee/administrator need to fill up a form for a repayment plan, to be submitted at the court.

Within a few weeks, there will be a hearing to approve your repayment plan. Your creditors can raise objections against the payment amounts, but the judge will have the final call!

Once a suitable repayment plan is constructed and gets approved, you will be making periodic payments to the court. The court, in turn, will pay your creditors, as per the payment agreement.

Hence, if you are debt trapped, it might be enticing for you to file a bankruptcy. But let me tell you, a bankruptcy is often considered as a last resort to pay off your debts. It helps you to start your financial life afresh. And once you file it, you don’t need to interact with your creditors anymore!

But it’s a serious decision with dire consequences like your credit score suffers a huge drop by around 160 to 220 points! Apart from your financial life, bankruptcy hampers your personal life too!

But you might come across certain situations, where you can’t see any other way-out except filing bankruptcy!

So, let’s check out some situations where bankruptcy is the best possible way-out!
Here you go!

You are being sued by the debt collectors

Debt collectors or collection agencies can file a lawsuit against you for your outstanding balance amount.

At this point, the worst thing you can do is ignoring the lawsuit summons! Even if your debt is time-barred (i.e. Statute of Limitations period is over), ignoring lawsuit summons can hurt you in the long run!

Because if you fail to show up in court, the collection agency can get a chance to win a default judgment against you!

If you can’t owe to make regular affordable plans to pay off your debts, you can go for filing bankruptcy. Because bankruptcy’s automatic stay prohibits most creditors to make collections during the whole process.

But make sure that your debts are not time-barred! Because some debts become time-barred after the statute of limitations (SOL) is over. Usually, the SOL usually ranges from about 3 to 6 years.

Once a debt is time-barred, you aren’t legally bound to repay your debts!

Your wages are garnished

Wage garnishment happens when your creditors sue you in court for regular nonpayment and win a case against you!

Under Title III of the Consumer Credit Protection Act (CCPA), the maximum garnishment in a week either has to be 25% of your net income. Or, 25% of the amount by which your net income exceeds 30 times the federal minimum wage, i.e., $7.25 per hour at present! Thus, it can be difficult for you to cover your regular expenses when your wages are garnished.

So, if you have received a notice for wage garnishment, you can declare bankruptcy. An injunction called automatic stay goes into effect when you file bankruptcy. This injection stops most of the collection activities like collection calls, letters, etc.

However, the automatic stay doesn’t apply to garnishments for domestic support obligations like child support or alimony.

Once your creditors get the notice of bankruptcy, the garnishment must stop! Even if your creditors want to garnish your wages, they have to seek court judgment.

But what if your wage garnishment has started before filing bankruptcy!

Well, in that case, the wage garnishment should have occurred during the 90 days prior to your bankruptcy filing date.

To recover this money, you need to file a lawsuit against your creditors in bankruptcy court.

You are unable to pay off your bills

Let’s say, you’re going through a financial crunch. And you’re not able to pay off your credit card bills.

You see a whopping rise in your outstanding balance amount every day. Because your daily outstanding balance amount is calculated on a compound interest basis! Yes, you heard it right!

Let’s say, today, your outstanding balance amount is $1000 and the APR (Annual Percentage Rate) is 10%. And the minimum payment for your credit card is $50 for this month.

So, your outstanding balance would be 1000.27 till midnight of this day! But, how so? See the calculation below!

((10/100) * 1000)/365 = 0.27 (since total no. days in a year = 365)

On the next day, your outstanding balance would be about ((10/100)*1000.27)/365 = $1000.544 and so on!

Some credit cards have a single purchase APRs for all customers. Others have a range from about 13% to 23% and your specific rate depends on your creditworthiness.

To stay from your credit card debt you can:

● Pay your bill in full every month, preferably within the grace period. Then you won’t have to pay any interest.

● If you can’t off your balance in full, try to pay as much as possible, preferably more than the minimum payment.

However, if you are up to the neck in debt and your income has taken a serious hit, it’s high time to file bankruptcy!

You may go for filing the chapter 7 bankruptcy, which is specially designed for the peeps whose income isn’t sufficient to carry their debt burden!

You have tried everything else

You might have tried negotiating with your creditors for a better payment plan and opted for refinancing loans too!

Maybe you have looked for a side hustle for an extra income. Also, you might have tried to consolidate debt to get out of the financial crisis!

But unfortunately, all your endeavors got into vain!

The high interests are making it cumbersome to pay off your debts and you are not able to find a solution. Declaring bankruptcy can help you to get relief from most of your debts!

But before you file bankruptcy, you should be aware of certain things like:

● You might think that bankruptcy courts operate similar to small claims court, which is usually settled in a day or two.

The most commonly filed Chapter 7 bankruptcy usually takes about 4 to 6 months to complete. Whereas, a Chapter 13 bankruptcy will take around 3 to 5 years to complete. And it may take about 2 years or more than that if you file a Chapter 11 bankruptcy.

● Do you feel uncomfortable discussing your paycheck with your friends?

If yes, declaring bankruptcy can be a tough task for you! Because you have to expose your financial life including your financial mistakes to the public while filing bankruptcy.

By the way, are you filing for bankruptcy protection?

Then you need to do file bankruptcy schedules, which is an extensive package of paperwork.

The schedules will comprise of all your debts, assets, income, expenses and recent financial transactions.

Besides, you have to attend a meeting of creditors. During that meeting, the bankruptcy trustee will ask you probing questions in a public room. Not only that, any of your creditors can ask you questions at the meeting.

Usually, these proceedings are open to the public and held in private only under extreme circumstances.

● Bankruptcy forms are somewhat like those confusing tax return forms! These forms contain complex, tricky questions about your financial status.

Forms like Schedule A to Schedule J, Statement of Financial Affairs, are one of the complicated ones!

So, it’s highly advisable to educate yourself with the bankruptcy process and its related forms before filing it.

Or you may approach an experienced bankruptcy attorney who will guide you through the entire process. But always remember that the services of an attorney come with a professional charge.

● The ultimate goal of filing bankruptcy is the discharge from your debts. But filing bankruptcy is not at all cheap. Rather, it comes with a price!

If you are filing bankruptcy through an attorney, you have to shell out a hefty amount as a professional charge. It can vary from about $500 to $3,500 depending on the complexity of the case.

Even if you prepare and file your own bankruptcy case, the filing fees alone are substantial.

Indigent debtors can seek relief from these fees by applying for a fee waiver to the bankruptcy court.

In case you are applying for a fee waiver, make sure your income is not greater than 150% of the federal poverty level!

● Usually, for Chapter 7 bankruptcy it takes about 4 to 6 months to get a discharge. Whereas, if you file a Chapter 13 bankruptcy, it can take upto 5 years to get a discharge from your debts.

In the meantime, your credit report gets affected to a great extent! The effect of Chapter 7 bankruptcy stays on your credit report for about 10 years whereas that of Chapter 13 stays for 7 years!

No doubt, after filing bankruptcy, you become free from your debts and start your financial life afresh!

But this is the time where you get vulnerable to the debt trap once again! Many credit card companies or credit unions are going to offer you credit cards. And you may get appealed to their lucrative offers!

But there is a catch! Credit card companies set a very high APR along with stringent terms and conditions. Because they know you can’t file bankruptcy again, before a specific time!

Well, you can opt for a credit card during this time. Your credit score suffers an abysmal drop after you file bankruptcy. So, you can charge your card for small amounts to improve your credit score.

But make sure to use your credit card responsibly and thereby avoiding to fall into the debt trap once again!

Hopefully, you have understood why bankruptcy is considered as a last resort to get out of the debt trap. And at times, it can be frustrating too! But it provides you a little breathing room when your finances are spiraling out of control!

So, it’s important to assess your situation before you file to make sure it’s the best choice!