First of all, it’s important to carefully evaluate your situation. Could you pay off your debts completely within the next three years while living a reasonable standard of living? If you answered yes, then there are probably better options for you such as becoming more disciplined in your spending and following a strict plan to get out of debt in the next few years. However, if the answer is no, you should definitely discuss this with an attorney who can help you decide if bankruptcy is right for you.
Here are several benefits you can gain by filing Chapter 7:
- You can stop an impending lawsuit
- you can prevent creditors from garnishing your wages
- you can stop evictions as long as you file before a state court has entered a judgment
- you can stop repossessions and foreclosures
- you can keep your drivers license even if you have unpaid fines or judgment
- you can stop IRS seizures dead in their tracks
It’s important to realize, however, that there are a number of situations in which bankruptcy may not be very helpful. Bankruptcy will not stop proceedings against a friend or family member who cosigned a loan for you (unless you establish a payment plan under Chapter 13 bankruptcy). Also, you may not have your debt wiped out if your debt is primarily made up of criminal fines, overdue child support or alimony, or unpaid student loans.
Gaining relief from creditors
When you initially file your bankruptcy petition with the court, you gain a tremendous benefit called the automatic stay. Believe it or not, this procedure actually prohibits any creditor from trying to garnish your wages or repossess your property. Creditors cannot sue you, and they cannot even contact you regarding your debts. If any creditor breaks the rules and tries to contact you or collect a debt without the court’s permission, they will have to answer to the federal bankruptcy judge (and probably have to pay fines as well).
Catching up on your payments and keeping your home
If you file Chapter 7, much, if not all, of your debt can be wiped away completely. However, you are still responsible for paying your mortgage and your car payments. If you fail to do so, your house can be foreclosed and your car can be repossessed. If you wish to keep these assets but don’t have the money to catch up on your payments immediately, you can propose a repayment plan under Chapter 13 bankruptcy. Chapter 13 allows you to catch up on your payments over the next few years. Typically, you’ll only end up paying what you can, while the rest is forgiven.
What you can lose in bankruptcy
Obviously, you should never take this decision lightly, as filing Chapter 7 or Chapter 13 can have long-term ramifications for your financial life. Your credit rating will be greatly damaged, and your petition will become a matter of public record. Your friends and family, especially those from older generation, may disapprove and cause strained relations with your loved ones.
Nevertheless, you should weigh the pros and cons carefully with the assistance of a good bankruptcy attorney (and perhaps a financial counselor) in order to determine whether this is the right decision for you. It’s true that there are many alternatives to bankruptcy, and you should carefully study your finances in order to find a way to pay everything off without having to declare yourself bankrupt, if at all possible.
However, at the same time many people go to great lengths to avoid bankruptcy (including cashing in their retirement accounts or obtaining a home equity loan), only to end up bankrupt in the end anyway. These individuals would have been better off filing sooner, because bankruptcy will not remove the home-equity loan nor recover retirement money that has been spent on paying off consumer debts.