When your debts spiral out of control and your bills start to pile up – and especially if you start getting those rude phone calls from collection agencies – if you’re like most people, you might consider filing for bankruptcy. However, you may not need to take that step. For some individuals in some circumstances, bankruptcy may be the only practical option, but it may or may not be the best option for you. Your particular circumstances may or may not make bankruptcy your only realistic alternative. For most individuals who end up declaring bankruptcy, it usually turns out to have been their best option.
In most cases, a person who files for bankruptcy has fallen into debt by missing mortgage payments or car payments or by piling up credit card debt or medical debt. For many of the people who eventually declare bankruptcy, these debts are then accompanied by a sudden job loss, a divorce, or a serious illness or injury. Interest and penalties start adding up, and at some point, the debts simply cannot any longer be paid. Bankruptcy is usually the appropriate option for people in precisely this kind of situation – people who truly need a clean financial slate. Is bankruptcy right for you? Your answers to the seven questions listed below should tell you if bankruptcy is or is not right for you. If it is, consult with an experienced Chicago bankruptcy attorney if you live in or near Chicago or with an experienced bankruptcy attorney near you.
QUESTION #1: ARE YOU ALLOWED TO FILE FOR BANKRUPTCY?
A Chapter 7 bankruptcy discharges – that is, it wipes out – “unsecured” debt, but a Chapter 13 bankruptcy reorganizes your debts. Under a Chapter 13 bankruptcy, you’ll still have to pay your debts, but you’ll be given the time you need to pay them. In most states, most debtors will find no legal obstacles to filing a Chapter 13 bankruptcy, but if you have or earn enough money to pay some of your creditors, you probably will not be eligible to declare a Chapter 7 bankruptcy.
How will the courts know how much money you have? Prior to filing any Chapter 7 bankruptcy, you must submit to and pass the financial “means test” that was established by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The means test is based on your average household income in the six months prior to the month you declare bankruptcy. It was created by Congress to identify those who genuinely need to file for a Chapter 7 bankruptcy and to fight fraud and the abuse of bankruptcy laws by those who don’t. If you make less than the median income in Illinois (or in the state where you are filing), you’ll qualify to file a Chapter 7 bankruptcy. If your income exceeds your state’s median income figure, and if you have cash remaining to cover some of your debts after you pay your essential monthly expenses, you can’t file for a Chapter 7 bankruptcy, but you should still discuss a possible Chapter 13 bankruptcy with your bankruptcy attorney.
QUESTION #2: WILL YOUR SITUATION IMPROVE IN THE NEAR FUTURE?
If you answered yes to the first question, now you’ll have to ask yourself about your future. You may be in dire financial straits today, but what about tomorrow or next year? Are you expecting to land a better job or to receive a financial bonus, gift, windfall, or inheritance? If your hardship situation is short-term, and if you believe that more money may soon be coming your way, it’s probably best to wait it out and avoid a bankruptcy. Bankruptcy offers some financial benefits and some legal protections to the people who genuinely need them, but candidly, there are also some negative consequences attached to filing for bankruptcy, and if you can avoid those consequences, you should. When your circumstances finally improve, be sure that taking care of your debts becomes your top priority.
QUESTION #3: ARE MOST OF YOUR DEBTS UNSECURED DEBTS?
Many may not realize it, but for most people, a bankruptcy does not make all of your debts go away. A bankruptcy “discharges” or wipes out only what are called “unsecured” debts: credit and charge card balances, medical bills, and similar debts. Other types of debts are called secured debts, and these include student loans, local, state, and federal tax debt, and anything you may owe to a court: spousal or child support, a personal injury judgement, or a civil or criminal fine. Bankruptcy can temporarily protect you from foreclosure or vehicle repossession, but after a bankruptcy you’ll still have to pay what remains on your home or vehicle. Add up your debts. If most of them are unsecured debts, filing for bankruptcy may be the right option for you.
QUESTION #4: CAN YOU ACCEPT BANKRUPTCY’S NEGATIVE CONSEQUENCES?
Before the formal bankruptcy process can begin, everyone who files is required by law to seek financial counseling and to enroll in a bankruptcy education course. These classes – whether you take them in person in a classroom setting or online – explain what can happen after you file for bankruptcy. You’ll learn about the damage that your credit rating will suffer and about the personal property you may have to surrender. The financial counseling should help you to avoid running up excessive debt in the future; it will also help you to determine whether or not you can be comfortable with a bankruptcy on your credit report for the next seven to ten years. If you fully understand the long-term ramifications of a bankruptcy filing, and if you’re okay with those consequences, bankruptcy might be just the option you need.
QUESTION #5: DO YOU HAVE A BETTER OPTION?
However, for many people in debt, bankruptcy may not be the only or the best escape from the debt nightmare. Contact your creditors – or have a reliable bankruptcy attorney contact them on your behalf – and see if they are open to private debt negotiation. Just be honest, and many creditors will be willing to work with you. You should also look into independent credit counseling. Most nonprofit credit counseling organizations have arrangements with major creditors to reduce interest rates, and their debt management plans are designed to get you out of debt in fewer than five years. Homeowners facing foreclosure can obtain temporary protection through bankruptcy, but homeowners should also look into the several government assistance programs designed to help families facing foreclosure.
The Home Affordable Foreclosure Alternatives (HAFA) program helps families make the move to affordable housing when they can no longer afford their current mortgage, and HAFA even provides up to $3,000 toward a family’s relocation costs. The Home Affordable Modification Program (HAMP) also helps homeowners who cannot make their monthly mortgage payments. If a homeowner is not receiving unemployment compensation but is nevertheless struggling to make mortgage payments, HAMP may be able to offer critical relief by reducing the monthly payment amount, if the lender is agreeable. Both HAFA and HAMP help homeowners to avoid bankruptcy, but depending on a homeowner’s individual circumstances, a bankruptcy filing may nevertheless remain a homeowner’s best option.
QUESTION #6: HOW WELL DO YOU KNOW YOURSELF?
It’s an important question. Do not underestimate the power of the thoughts you may have or the emotions you may feel during and subsequent to a bankruptcy filing. Many people who file for bankruptcy experience tremendous relief when their bankruptcy is approved. Others, however, feel guilt, and some even suffer depression. Take plenty of time to work through your deepest feelings and convictions – and your prejudices – about debts and obligations. Bankruptcy is a legally-approved way to deal with your debts when you cannot afford to pay them, and sometimes it is the most responsible financial move that a person can make. If you know yourself well enough to know that you’re going to feel guilt after a bankruptcy, whether or not that feeling is rational or justifiable, bankruptcy may not be the alternative that’s best for you.
QUESTION #7: WILL YOU BE IN A BETTER PLACE AFTER BANKRUPTCY?
Bankruptcy’s biggest advantage is that it allows conscientious people to “reboot” their financial lives and to make enduring, positive changes. It should teach those who file to be more cautious in the future and to alter their spending habits. The problem is that far too many people fail or refuse to learn the lessons that bankruptcy is designed to teach. Some people make the same mistakes and wind up right back in debt again quite quickly. If you file for bankruptcy, will you know what to do differently? Are you ready, willing, and able to make a commitment to change your spending habits? If your answer is yes, then bankruptcy might be the right way for you to deal with your debt troubles.
Those are the seven questions you should ask yourself – and answer for yourself – when considering bankruptcy. By this point, you should have a pretty good idea whether or not bankruptcy is right for you. You can file for bankruptcy without an attorney’s help, but that is never a wise choice. You could lose even more money, and if you make any mistakes with the paperwork, your bankruptcy petition could possibly be delayed or possibly even denied. Consult first with a good bankruptcy lawyer. In the Chicago area, if you are considering a bankruptcy filing, or if you simply need to learn more about bankruptcy in Illinois, contact an experienced Chicago bankruptcy attorney promptly.