When Does Filing Bankruptcy Make Sense?

A critical question for anyone in financial distress is when to file bankruptcy. There are a number of factors to weigh, such as:

Eligibility

There are eligibity requirements for bankruptcy. Chapter 7, or liquidation bankruptcy (when most of your assets are liquidated for the benefit of creditors, after which your debts are discharged) has very broad standards, so eligibility is not usually a problem. However, Chapter 13--which forces debtors to live according to a court-ordered budget, but does NOT require them to liquidate assets--is only available if the would-be filer's unsecured debts are less than $360k, and their secured debts less than $1mm.

Nondischargeable Debts

As a matter of public policy, certain debts may not be discharged in bankruptcy. The main ones are:

• Child support and alimony
• Taxes
• Debts caused by DUI/DWI
• Criminal fines
• Most student loans

If most of your debt belongs to one or more of these categories, bankruptcy will probably not help you.

Secured Debts

Secured debts have property as collateral to ensure repayment. Car loans, mortgages, and home equity loans are common secured debts. Bankruptcy does not wipe out a creditor's right to reposses or foreclose on property, if the debt it secures is not paid. While the exact mechanics vary by type of bankrupty, if the debtor doesn't keep paying the secured debt, he or she can still lose the property. If most of your debts are secured and you want to keep the property securing them--such as your home--bankruptcy may not help you as much as you'd like.

Other Options

Sometimes, you can settle a debt for less than the full amount. Or arrange to pay it off over a longer time. Or take out a lower-interest loan to consolidate and pay off other debts. It's often worth pursuing, or at least carefully considering, other options before declaring bankruptcy.

Temporary or Long-term Cashflow Problem

Bankruptcy will either force you to live under a strict budget or make you liquidate assets; it will also affect your credit for a decade. It's an appropriate tool to deal with long-term problems; however, it's often overkill if you are simply having a short-term cash flow problem. In that case, negotiating some deferment or delay in payment from creditors, or borrowing money, such as from family, to tide you over the rough patch may be better.

When an Attorney Can Help

Deciding when bankruptcy is the right option involves weighing many factors. An experienced attorney can help you make the right choice. Good guidance is critical: just as you don't want to declare bankrutpcy when you don't need to, you don't want to fail to avail yourself of this powerful tool when it's appropriate.