Is Bankruptcy The Right Choice For You?

Posted on: 9 August 2017

You may feel that you are so far in debt that filing for bankruptcy is your only solution. However, there are other possibilities to explore and some issues that may effect your ability to file bankruptcy without additional loss.

You can't just file for bankruptcy and become debt free without some repercussions. However, if you are forced into it by circumstances beyond your control, you should be prepared to protect whatever assets that are protected by both state and federal bankruptcy law.

What are some other options to try before filing for bankruptcy protection?

If your creditors haven't yet filed for a judgement in civil court to force repayment of your debt, you can try to set up a payment plan and ask for interest rate and fee reductions to help you to  bring your accounts up to date.

You can also set up a debt repayment plan through a local non-profit credit counseling service. They will negotiate with your creditors to reduce your obligations. You will then make a single monthly payment to the counseling service, who will distribute it among your creditors.

Of course, both of these plans require a minimum amount of income, and your payments will be based on the amount of debt owed, not your income.

Do you own a home or have equity in your home?

If your own your home outright or have significant equity in your home, you can apply for a home equity loan to pay off your other delinquent loans. Of course, this is not an option if you are seriously behind on your mortgage payments. Having significant equity in your home can also effect your ability to file for bankruptcy without losing your home in the process.

Bankruptcy exemptions

Bankruptcy law allows you to keep a limited amount of equity in your home if you file for bankruptcy protection, but if the equity in your home exceeds the amount allowed, your home may be seized and sold during bankruptcy proceedings, with any profits beyond those protected by exemption distributed among your creditors.    

Exemptions, particularly the homestead exemption which protects equity in your home, vary from state to state. While some states allow a bankruptcy filer to choose between using federal exemption and their individual state exemptions, other states require the filer to use only their individual state exemptions.

Excessive equity in your vehicle can also result in the vehicle being surrendered to pay creditors in some states, depending on their individual exemptions. While some exemptions are focused on specific items such as homes and vehicles, other can be used with greater flexibility and combined to protect additional equity in homes and vehicles.

Bankruptcy law is even more complicated than it sounds, so unless you are completely destitute with nothing to lose in bankruptcy, hire a bankruptcy attorney to guide you through the process and take full advantage of any exemptions or other factors that can make it a little less painful as you attempt to rebuild your life without the burden of excessive debt.