Filing Bankruptcy: An Important Decision

Many people are surprised to learn that there are circumstances where filing for bankruptcy does not make sense.  If filing for a chapter 7 bankruptcy will not help alleviate your current debt problems, if it forces you to give up property you want to keep, or if it is unnecessary because of your financial situation, then a bankruptcy filing may not make economic sense.

Some of the things you should consider are:

1) Will bankruptcy discharge enough of your debts?

Certain types of debt may survive chapter 7 bankruptcy.  So if your goal is to rid yourself of these nondischargeable debts, then it may not make much sense for you to file for bankruptcy in the first place.  The following types of debts either automatically survive bankruptcy or they survive unless a particular exception applies:

• Debts other than support that arise from a martial settlement agreement or a divorce decree;
• Back child support and alimony;
• Government fines, penalties, or court-ordered restitution;
• Student loans;
• Tax arrearages; and
• Court judgments for injuries or death resulting from drunk-driving convictions.

2) Are you judgment proof?

Most unsecured creditors are required to obtain a judgment from a court before they can start collection procedures such as a wage garnishment or selling a debtor’s personal property.  If your debts are mostly of the type that require a judgment, then you should ask yourself whether you have any income or property that your creditors can seize if they do obtain a judgment.  For example, if all of your property is legally exempt or if all of your income comes from Social Security (which cannot be taken by creditors), then there is nothing that your creditors can do with their judgments.  Although you may want to file for bankruptcy to get a fresh start, nothing bad will happen if you do not do so no matter how much debt you have.

3)  Will you lose valuable property?

In a chapter 7 case, the bankruptcy court will erase your dischargeable debts if you are willing to give up your nonexempt property to be sold for the benefit of your creditors.  But if you are unwilling to part with property that is valuable to you, then you may want to consider other alternatives.

4) Will a cosigner have to pay your debts?

If someone else cosigned a loan with you, that person can be held responsible to repay the debt if you do not.  Therefore, even if your debts are discharged in a chapter 7 bankruptcy, your consignor will still have to pay them. That could prove to be a rather difficult situation if the cosigner happens to be a friend or relative.