7 Reasons You Should Not File for Bankruptcy
20.05.12
I gather with a lot of people who believe that bankruptcy is going to be their best option. And truthfully, for most of the people I find with bankruptcy is not only the best option but something they should have done a long time ago. However, when I meet with families, there are those that should not file for bankruptcy for one why and wherefore or another. I have put together a list of seven (7) reasons why you should not file for bankruptcy.
#1 You Can Afford to Pay Your Debts
This one seems stark, and is truly rare among most people I meet with, but every now and again someone comes in and simply wants to accompany away from it all. The debt is relatively minimal compared to income. A good way to draw if you fall into this category is to take your monthly income, minus all of your monthly expenses, including your trust card payments, and if there is a significant amount of money left over, you are likely going to be advantage off in the long term just making arrangements to pay the debt.
That being said, I have had clients end up in who have very little debt. Very little debt in my world is something in the range of $10,000. However, for some clients his might as well be $10 million. They have no job or very reduced income and no serious prospects for improving their income situation in the near future. I also see many seniors who are living on a very stuck income fall into this category. For some, even when the debt is relatively small, if the ability to pay is not there, bankruptcy can be a piece-goods e freight option.
#2 Your Debt is Mostly Tax Debt
Not all debts are created equal. Certain debts, even in bankruptcy, are not discharged or eliminated through the bankruptcy manipulate. Most taxes fall into this category. Certain taxes like payroll taxes a transaction owner owes will never go away. The typical income tax will not be eliminated in your bankruptcy unless it meets valid criteria. Specifically, it must be at least three years old and must not have been assessed to you at any time in the last 240 days. If the seniority of your debt is taxes and relatively recent, bankruptcy is likely not going to be a good way out because you will not obtain the benefit of discharging those debts.
However, if your debt is income tax, and it is at least three years old, you should stumble on with a bankruptcy attorney to see if it can be eliminated through bankruptcy filing.
#3 Your Debt is Mostly Student Loan Debt
The only thing more difficult to exclude through bankruptcy other than taxes is student loan debt. Back in 2005 the Bankruptcy Code was amended to include a provision that made all debt obtained for eerie purposes presumed to be non-dischargeable. You can overcome this by showing hardship; however the bar has been set very high. I witnessed a attempt once where an attorney who had significant student loan debt sought to eliminate these debts through bankruptcy after an auto fortune left her a quadriplegic. The court ruled that she could still work and only reduced her loans by half.
If student loan due is the main debt problem you have a better option than bankruptcy would be to seek out the many organizations that keep from with student loan borrowers going through financial hardship.
#4 Filing Bankruptcy Will Hurt Your Credit Basis
It is pretty much common knowledge that filing for bankruptcy is going to damage your credit sitting duck. How much it will lower your score is hard to say; I have noticed that for those bankruptcy clients who have low scores when we file their situation (550 or lower) that the bankruptcy doesn't lower the score that much more - typically another 30-50 points. However, for those clients who have moderate credit (700 or higher) they usually take a hit in the range of 100 - 150 points. I don't distinguish why this is or what the formula is for calculating this, but this is what I have observed in the hundreds of bankruptcy cases I have filed.
While bankruptcy will absolutely drop your credit score, most of my clients are surprised to see that their score will actually increase within 12 months of their bankruptcy the truth being discharged. Most who look to file for bankruptcy are behind on their bills. When you fall behind on your credit card payments each month the assign card company lets the credit bureaus know that you are late. This lowers your hundreds of thousands and continues to hit you month after month.
The filing of a bankruptcy stops the bleeding. You are no long getting hit each month with a "in". You will get hit with a bankruptcy on your credit report, but that is a onetime thing; it is not re-reported each month. The further you get away from your filing fixture the better you will be.
#5 You Can Lose Assets in Bankruptcy
Another reason you may not want to file for bankruptcy, particularly Chapter 7 bankruptcy, is that you can be at risk of losing assets. A Chapter 7 bankruptcy is a liquidating bankruptcy, interpretation that if you have assets that are not protected under the various exemption laws, then a bankruptcy trustee can seize the asset, exchange it, and give the money to your creditors. If you have assets that are not protected you will likely lose them. For some, this is a big reason not to submit. There may be land that is not protected that has been in the family for generations, or other property that is simply not worth the gamble of losing.
That being said, most people that go through the bankruptcy process do not lose assets. Here in Arizona the last statistic I heard was that 94% of Chapter 7 bankruptcy filers did not fritter any assets through the process. This is largely due to the exemption laws here in Arizona. Most people have heard of the homestead exclusion that protects your home, however Arizona also has exemption laws that protect cars, mixing rings, retirement accounts, household items and even livestock. If you are thinking of filing bankruptcy but are agitated about losing assets it is a good idea to meet with a bankruptcy lawyer to determine what you would be at danger of losing. Often this fear is unfounded.
#6 You Have Recently Become Entitled to an Inheritance
This one seems kind of unpremeditatedly, but I have surprisingly had it come up enough times that it is worth mentioning. If you have received an inheritance, or the more associated situation is that you have become entitled to receive an inheritance but have not yet received it, filing bankruptcy may not be a good election for you. For example, say you were the beneficiary under a will or trust of a person that had died. You became entitled to a certain asset or lolly upon their death. It is likely that it will take some time to process everything and you may not actually receive the inheritance for some everything. If you file for bankruptcy and then receive the inheritance, your bankruptcy trustee can take that asset and use that for the benefit of your creditors.
Similarly, if you become entitled to an property within 180 after you file your bankruptcy case the bankruptcy trustee can go after those funds to pay your creditors. In situations where the birthright is large, your creditors end up receiving 100% payment but you still have to deal with a bankruptcy on your credit communiqu.
If you have become entitled to an inheritance or expect to become entitled to an inheritance in the near future, you should consult with a bankruptcy attorney about this lay of the land prior to jumping into a bankruptcy case.
#7 You Have Business Debts that are Not Personally Guaranteed
Many skimpy business owners file for bankruptcy. In fact, if you think about it, without the bankruptcy laws how many people would be eager to lay it all on the line and start their own business? Bankruptcy allows entrepreneurs to take the risk knowing that if life-and-death they have bankruptcy as a fallback position. If most of your debt is business debt AND you do not have personal guarantees on that responsibility, bankruptcy may not be necessary. If you have properly set up a corporation or limited liability company (LLC), you will have some protection against creditors of the transaction. Without a personal guarantee the creditors are left to the assets of the business but cannot come after you as an individual.
However, in most small businesses the owners of the business have personally guaranteed nearly all of the debts of the point. If this is the case, then a personal bankruptcy filing can be very helpful at eliminating all personal liability on those point debts.
Bankruptcy is not for every person or every situation. There are absolutely draw backs for filing a bankruptcy box. However, for many suffering through debt problems the benefits obtained from filing a bankruptcy case take precedence over the drawbacks the come with filing.
If you are concerned that the obstacles to bankruptcy may be too great in your situation, give me a call. My bankruptcy consultations are always munificent. I would be happy to sit down with you, go over your situation, and help advise on the best course of action. I can be reached at (480) 420-4028 or kill me an email at john@skibalaw.com.
Source: JD Supra (press release)
"Some of the students who banked with us were qualified to get a loan to one school but not the other" because RBS Citizens would lend only in the states where it had branches, he said. Now students can administer to schools in all 48 contiguous states and apply
The unmitigated amount of student debt is now over $1 trillion. In an effort to keep the default rate low, student loans cannot be discharged in bankruptcy. At hand over, the interest rate is 3.4 percent, but this subsidy is at risk as there is a measure
They control student loans for the US Education Department, which began its lending program in 1965. The groups pledge loans made by banks and other private lenders. They promise to repay the lenders if borrowers don't. If the agencies can't retrieve