Five Questions to Ask Yourself Before Filing for Bankruptcy

If you are among the millions of Americans struggling to pay their bills during these difficult economic times, you may be considering filing for bankruptcy. Filing for bankruptcy still has a stigma around it, and it can be difficult for people to take the first step to discuss your case with the bankruptcy attorney. 

In many cases, filing for bankruptcy allows people to make a fresh financial start. For example, filing for bankruptcy stops all creditors from trying to collect from you. Filing for bankruptcy can result in your unsecured debt and some of your secured debt being discharged. If you are considering filing for bankruptcy, here are five questions you can ask yourself to help you determine if it is the best option for you.

• What are My Immediate Financial Goals?

The first question you should ask yourself relates to your current financial goals. If you do not know how you will be able to survive financially for a month, or even a week, filing for bankruptcy may be a helpful option. When you file for bankruptcy, the bankruptcy court will Issue an order requiring your creditors to stop contacting you and trying to collect from you. If you believe that your creditors will sue you soon or have already been sued, the bankruptcy order will stop all collections from proceeding. It will eliminate judgments like liens and wage garnishments, giving you time to work on addressing your financial situation. 

If you have the funds to pay off at least some of your debts, you can try to negotiate and settle your debts. You may be able to settle your debts before your creditors begin pursuing legal action against you. A bankruptcy attorney may be able to help you negotiate with your creditors so you can pay off your debt without having to file for bankruptcy. Many creditors would rather negotiate a lower settlement with you than risk obtaining no money from you after going through the collections process. 

• What Do I Have to Lose?

It is a common concern that you will have to lose all of your personal property when you file for bankruptcy. Whether or not you will lose your property depends on the type of bankruptcy you file. For example, if you file for chapter 7 bankruptcy, also called liquidation bankruptcy, you will need to sell or liquidate many of your assets to pay your creditors back. However, there are exemptions you can use to keep some of your personal property. You should carefully consider which items you are willing to liquidate and which items you would be able to keep when filing for bankruptcy. 

• What is the Root Cause of My Financial Troubles?

Another important factor to consider is the root of your financial troubles. There are many different reasons people need to file for bankruptcy. One of the most common reasons involves medical debt. Even when a person has health insurance, the copays and procedures they need that are not covered by insurance can result in hundreds of thousands of dollars in debt. Filing for bankruptcy may be one of the only ways you will be able to have this debt discharged so you can move on with your life.

If the root of your financial problems involves overspending and poor budgeting, and your debt is not overwhelming, you may benefit from changing your financial habits. You may be able to create a realistic but tighter budget so you can allocate more money each month toward paying off your debts. Additionally, you may be able to renegotiate the terms of your debt to a more manageable level. Filing for bankruptcy will allow you to discharge many of your debts, but if you engage in the same spending habits, you will find yourself back in a similar situation. Taking some time to think about why you need to file for bankruptcy and what steps you will take to prevent the need to file for bankruptcy again can be tremendously helpful.

• Will I Qualify for Bankruptcy?

If you file for bankruptcy, you will likely choose to file for Chapter 7 and Chapter 13 Bankruptcy. If you file for bankruptcy, you will likely choose to file for one of these types. In a Chapter 7 bankruptcy, you will sell or liquidate your non-exempt assets. The trustee will distribute the funds from those sales to your creditors. Any debt that remains will be discharged or erased. To file for Chapter 7 bankruptcy, you must meet a means test. You may not qualify for a Chapter 7 bankruptcy if you earn too much income. However, do not assume you will not be eligible because you earn a decent living. 

A bankruptcy attorney can help determine whether you qualify for a Chapter 7 bankruptcy. In a Chapter 13 Bankruptcy, the debtor agrees to a payment plan, typically over three to five years. Each month you will make payments from your disposable income. Your qualifying debts will be discharged at the end of the agreed-upon term. There are limits on how many times you can file for bankruptcy within a specific time frame. 

• How Will Filing for Bankruptcy Affect Me Long Term?

You may be concerned about filing for bankruptcy because it will lower your credit score and limit your opportunities to purchase a vehicle or home. It is essential to consider how your financial future will be affected by filing for bankruptcy. Your bankruptcy will remain on your credit score for 10 years if you file for Chapter 7 bankruptcy and seven years if you file for a Chapter 13 bankruptcy. It will make it more challenging to apply for new credit, a new job, a mortgage, or another type of loan. Nonetheless, there are steps you can take to improve your credit score. Many people can increase their credit score and enjoy a fresh financial start after filing for bankruptcy.