Finances & Debt

6 Questions to Ask Before You File for Bankruptcy

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If you can’t pay off your debt, one of the first things you might ask yourself is, “Should I file for bankruptcy?” After all, it seems like it would solve the problem once and for all, right? You would have a clean slate and could start fresh.

It’s true that bankruptcy can give you a fresh start. And in some situations, bankruptcy is the best option. But there are a lot of things to consider before you make this major decision, so ask yourself these questions before you file.

1. Have I exhausted all other options?

There are a lot of things you can do to avoid bankruptcy. Make sure you consider these steps:

  • Contact your lenders to see if they can work out a payment plan. Most lenders would much rather do this than have to forgive your debt completely when you file for bankruptcy.
  • Sell some of your assets. You may be surprised at how much cash you can raise to pay off your debts.
  • Eliminate all unnecessary expenses. Take a good, hard look at your spending. Are you spending a lot of money eating out? Do you really need that large cable tv package? Don’t let yourself off the hook — you might be surprised at how fast unnecessary spending adds up. Put together a budget and stick with it. Anything you don’t absolutely need may have to be cut — at least temporarily — so you can put more money toward your debt.
  • Sign up for credit counseling. Before you file for any kind of bankruptcy, you have to undergo credit counseling from a government-approved agency. It must include a two-hour financial management course. All of this has to be completed no more than 180 days before your bankruptcy discharge. It’s a worthwhile process; sometimes credit counseling services can help people avoid bankruptcy altogether.

2. Do I have enough debt to justify bankruptcy?

The fallout from bankruptcy can last for years. That’s why it’s important that bankruptcy be your last resort. There’s no minimum amount of debt you must have to file — what justifies bankruptcy for one person might be manageable debt for someone else. This is why it’s vital you work with a credit counselor to see what other options you have — he or she can help you decide, then, if bankruptcy is the only option left to you.

3. Do I have debt that bankruptcy won’t eliminate?

Bankruptcy doesn’t wipe out all kinds of debt. Examples of debt that can’t be eliminated by filing for bankruptcy include:

  • Secured debt like car loans. Your mortgage may also be considered secured debt and may be exempt from your bankruptcy filing depending on the type of bankruptcy you file and the terms of your mortgage agreement.
  • Student loans, whether from the government, private lenders of individual universities. (There are a few exceptions to this if you can prove to the court you’ve made an effort but the payments will cause you “undue hardship.”)
  • Alimony and child support or any other legal obligations to make payments due to a divorce or civil case.
  • Property liens, including on your home mortgage.

What types of debt can be eliminated by bankruptcy, you might be wondering? Big categories include credit card debt, medical bills, business debts, personal loans and utility debt.

4. Do I make too much money to file for bankruptcy?

Your income plays a factor in what type of bankruptcy you can file for. If you want to file for Chapter 7 bankruptcy, for example, your monthly income must be less than your state’s median income. This is referred to as “passing the means test.” (Check the Department of Justice website for your state’s median income.) If your income is more than the median income, you may qualify for Chapter 13. The means test for bankruptcy can be complicated and varies by state so you’ll want to consult with an attorney well-versed in bankruptcy law.

5. Am I being hounded by bill collectors?

The stress of major debt — and the incessant requests of debt collectors — can be unmanageable for many people. Once you file for either Chapter 7 or Chapter 13 bankruptcy, bill collectors have to stop contacting you. This in and of itself can do a lot to reduce your stress.

6. Have I talked through my options with a professional?

Bankruptcy is complicated and a major decision that can have wide-reaching effects on your life. Be sure to talk through everything with a bankruptcy attorney to make sure you fully understand the responsibilities and repercussions before you file.

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