When the question is, ‘Is bankruptcy right for me?’

For many people, declaring bankruptcy is not only a financial decision; but sometimes a personal one. Therefore, no one can really advise someone if bankruptcy is right for them.

However, factors against it such as the stigma of filing bankruptcy have considerably lessened over the years. Moreover, the federal government has deliberately carved out a place in the IRS code for individuals who need a fresh start by filing bankruptcy, for example a Chapter 7.

In light of the preceding, there are several things to consider before filing Chapter 7 bankruptcy. The most basic question is “Can you file for bankruptcy?” If an individual or company has enough money to pay their creditors, they may be ineligible to file for bankruptcy.

How would the bankruptcy courts know if an individual or company is qualified to file for bankruptcy? They will be required to complete specific paperwork, show recent tax filings and pass the “means test” created within the Bankruptcy Code. If they make less than the median income established in California, the individual may qualify. On the other hand, if their income exceeds that figure and they have money left over after paying necessary monthly expenses, the individual might not be able file.

If the immediate financial future is bleak with no prediction that it will improve, bankruptcy might be the answer.
But what if the hardship is temporary? What if an individual or company foresees better cash flow in the next couple of months or even six to eight months from now? That person may want to wait it out. When financial circumstances improve, they could pay down more debts.  But only the individual knows if they can endure the pressure of collections letters, services being cut off, debt collectors calling and creditor lawsuits being filed against them.

Another decision to discuss is what if the individual’s or company’s debts are long term, income continues to dwindle, most debts are unsecured and it seems like there is a no light at the end of the tunnel? Will all debts and liabilities go away in bankruptcy? Bankruptcy discharges most unsecured debts such as credit and charge card balances, medical bills, collection accounts, but other debts like student loans, certain tax debt, certain legal bills and child support arrearage may not go away even though they are unsecured. In addition, liens on a secured debt like a mortgage or a car loan may remain the individual’s obligation to pay unless there is a cramdown which is a debt restructuring that individuals or companies must accept as part of their bankruptcy. Liabilities should be checked to see if the bulk is dischargeable or not. After considering all these issues, the individual or company may wish to file a Chapter 7 bankruptcy. There is also a Chapter 13 bankruptcy, but that topic is for another day.

Lastly, be sure to thoroughly understand the downsides of bankruptcy and the conditions that must be met in order to be successful in a bankruptcy. What exactly are the downsides and the conditions of bankruptcy? For example, the individual’s credit rating score will drop and the bankruptcy filing will be on their credit report for a long time. Also, there are some simple conditions that must be met. For example, the individual will be required to take a pre-bankruptcy credit counseling course after they file their petition for bankruptcy. The course is inexpensive and takes about 60 to 90 minutes to complete usually. There is also an inexpensive post-bankruptcy debtor education course. The course is usually a little more than 2 hours and must be completed no later than the 45th day after the individual’s meeting of creditors, also called a 341 hearing. Both courses can be taken online. Joint bankruptcy filers can take the courses together.

Please note the information provided above is general and must not to be relied upon for specific legal needs. Always consult an attorney to answer legal questions. For more information about bankruptcy or other legal matters, contact the Law Offices of Morton J. Grabel in Temecula at (951) 695-7700.

 

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