Bankruptcy is a court proceeding where you tell a judge you can’t pay your debts. The judge and court trustee examine your assets and liabilities to decide whether to discharge those debts. If the court finds that you really have no means to pay back your debt, you declare bankruptcy.
Who should not file for Bankruptcy
While there are many reasons to file for Bankruptcy protection, there are a number of reasons for a person to not file for Bankruptcy.
The following are examples of some individuals that should not file for bankruptcy;
• A person had taken out credit cards under different social security numbers because his credit was bad under one number and then he intentionally changed his social security number on credit card applications in order to obtain additional credit cards.
• A person charged tens of thousands of dollars of merchandise on his credit cards. He then gave all of the merchandise away to his friend and then came in to file bankruptcy right after giving away all of his merchandise.
• A person who has been accused of intentionally and wilfully defrauding many creditors.
• A person transferred his home, his automobile and his possessions to a relative within the previous month and then wanted to immediately file Bankruptcy.
• A person who is expecting to incur a large amount of medical expenses in the near future should not file bankruptcy unless he or she has taken out insurance coverage which will provide excellent medical insurance for any future medical expenses that will be incurred.
• A person is inheriting a house without any mortgage as a result of the recent death of a parent. In addition if you are about to inherit assets worth a substantial amount of money then filing for bankruptcy is not usually a good idea.
• You just borrowed ten thousand dollars on your credit card and immediately gave all the money to your fiancé or loved one and then come in next week and want to file for bankruptcy
• You have a very large income and have no problem completely paying off in full all of your outstanding bills in full in the next three to four months
• Your only debt is student loan debt and you have a job and are working. If you have a stable income and have no debts besides student loans, you will find that student loan debt is quite difficult to discharge.
• There are other times in which filing a Bankruptcy is not the best move and other approaches may provide you with a much better result. We can advise you as to the right move to make in your specific situation.
Reasons Not to File for Bankruptcy
You Can Afford to Pay Your Debts
This one seems simple, and is truly rare among most people I meet with, but every now and again someone comes in and simply wants to walk away from it all. The debt is relatively minimal compared to income. A good way to determine if you fall into this category is to take your monthly income, minus all of your monthly expenses, including your credit card payments, and if there is a significant amount of money left over, you are likely going to be better off in the long term just making arrangements to pay the debt.
Your Debt is Mostly Tax Debt
Not all debts are created equal. Certain debts, even in bankruptcy, are not discharged or eliminated through the bankruptcy process. Most taxes fall into this category. Certain taxes like payroll taxes a business owner owes will never go away. The typical income tax will not be eliminated in your bankruptcy unless it meets certain criteria. Specifically, it must be at least three years old and must not have been assessed to you at anytime in the last 240 days. If the majority of your debt is taxes and relatively recent, bankruptcy is likely not going to be a good option because you will not obtain the benefit of discharging those debts. However, if your debt is income tax, and it is at least three years old, you should meet with a bankruptcy attorney to see if it can be eliminated through bankruptcy filing.
Your Debt is Mostly Student Loan Debt
The only thing more difficult to eliminate through bankruptcy other than taxes is student loan debt. Back in 2005 the Bankruptcy Code was amended to include a provision that made all debt obtained for educational purposes presumed to be non-dischargeable. You can overcome this by showing hardship; however the bar has been set very high. If student loan debt is the main debt problem you have a better option than bankruptcy would be to seek out the many organizations that help with student loan borrowers going through financial hardship.
Filing Bankruptcy Will Hurt Your Credit Score
It is pretty much common knowledge that filing for bankruptcy is going to damage your credit score. While bankruptcy will absolutely lower your credit score, most of my clients are surprised to see that their score will actually increase within 12 months of their bankruptcy case being discharged. Most that look to file for bankruptcy are behind on their bills. When you fall behind on your credit card payments each month the credit card company lets the credit bureaus know that you are late. This lowers your score and continues to hit you month after month. The filing of a bankruptcy stops the bleeding. You are no long getting hit each month with a “late”. You will get hit with a bankruptcy on your credit report, but that is a onetime thing; it is not re-reported each month. The further you get away from your filing date the better you will be.
You Can Lose Assets in Bankruptcy
Another reason you may not want to file for bankruptcy, particularly Chapter 7 bankruptcy, is that you can be at risk of losing assets. A Chapter 7 bankruptcy is a liquidating bankruptcy, meaning that if you have assets that are not protected under the various exemption laws, then a bankruptcy trustee can seize the asset, sell it, and give the money to your creditors. If you have assets that are not protected you will likely lose them. For some, this is a big reason not to file. There may be land that is not protected that has been in the family for generations, or other property that is simply not worth the risk of losing. That being said, most people that go through the bankruptcy process do not lose assets. If you are thinking of filing bankruptcy but are worried about losing assets it is a good idea to meet with a bankruptcy lawyer to determine what you would be at risk of losing. Often this fear is unfounded.
You Have Recently Become Entitled to an Inheritance
If you have received an inheritance, or the more relevant situation is that you have become entitled to receive an inheritance but have not yet received it, filing bankruptcy may not be a good option for you. For example, say you were the beneficiary under a will or trust of a person that had died. You became entitled to a certain asset or cash upon their death. It is likely that it will take some time to process everything and you may not actually receive the inheritance for some time. If you file for bankruptcy and then receive the inheritance, your bankruptcy trustee can take that asset and use that for the benefit of your creditors. Similarly, if you become entitled to an inheritance within 180 after you file your bankruptcy case the bankruptcy trustee can go after those funds to pay your creditors. In situations where the inheritance is large, your creditors end up receiving 100% payment but you still have to deal with a bankruptcy on your credit report. If you have become entitled to an inheritance or expect to become entitled to an inheritance in the near future, you should consult with a bankruptcy attorney about this situation prior to jumping into a bankruptcy case.
You Have Business Debts that are not personally Guaranteed
Many small business owners file for bankruptcy. In fact, if you think about it, without the bankruptcy laws how many people would be willing to lay it all on the line and start their own business? Bankruptcy allows entrepreneurs to take the risk knowing that if necessary they have bankruptcy as a fallback position. If most of your debt is business debt AND you do not have personal guarantees on that debt, bankruptcy may not be necessary. If you have properly set up a corporation or limited liability company (LLC), you will have some protection against creditors of the business. Without a personal guarantee the creditors are left to the assets of the business but cannot come after you personally. However, in most small businesses the owners of the business have personally guaranteed nearly all of the debts of the business. If this is the case, then a personal bankruptcy filing can be very helpful at eliminating all personal liability on those business debts. Bankruptcy is not for every person or every situation. There are absolutely draw backs for filing a bankruptcy case. However, for many suffering through debt problems the benefits obtained from filing a bankruptcy case outweigh the drawbacks the come with filing.
Will Bankruptcy Wipe Out Your Debt?
Not all debts get discharged in bankruptcy. If you’ll still have to pay your most worrisome bills after filing for bankruptcy, then filing probably won’t be good idea. On the other hand, if filing for bankruptcy gets rid of enough debt that you’ll have more money to devote to non-dischargeable debt, bankruptcy might still help. Below are some debts that are either difficult or impossible to wipe out in bankruptcy. Also, creditors with these types of debt can use collection techniques like wage garnishments or bank levies even without a judgment.
Past Due Child Support
A Chapter 7 bankruptcy filing won’t eliminate or reduce child support debt. So filing for Chapter 7 bankruptcy won’t help unless you can free up future income you can use to pay your child support by discharging other debt. A Chapter 13 bankruptcy case, however, can be a better option. You can stop collection actions by entering into a three to five year repayment plan to pay off your past-due support payments in full. Be aware that if you have a hefty outstanding balance, your monthly payment might be steep because you must pay off all of the arrearages in the plan. You’ll still have to continue making your ongoing child support payment, as well.
If you can catch up in Chapter 13 bankruptcy, here are some of the complications you’ll avoid:
• wage garnishment
• loss of unemployment compensation
• jail time
• offsets of federal or state income tax refunds
• passport denial
• offsets of state lottery winnings
• driver’s license suspension
• reduction of workers compensation benefits, or
• reduction of social security or disability benefits.
Past due Income Taxes
Taxpayers with outstanding tax debts are subject to a levy on assets or other income sources. A levy is a legal seizure of your property to satisfy a debt. Once a levy is in place, it usually remains until you pay off your tax debt.
If you owe past-due income taxes and you do nothing, you could face the following:
• losing state or federal tax refunds
• a reduction in social security benefits
• a wage garnishment (depending on the state in which you live), or
• a lien against your real estate.
Understand that a bankruptcy filing won’t eliminate recent tax debts. However, through a Chapter 13 case, you might be able to pay off the tax debt over a period of three to five years.
Student Loans
If you’re in default on your student loans, the lender could result in a:
• wage garnishment (depending on the state in which you live)
• offset of federal and state income tax refunds
• loss of eligibility for federal aid, including Pell grants
• loss of deferment or forbearance options, or
• reduction in Social Security income.
It’s not easy to discharge student loan debt in bankruptcy. You must prove that paying your loans will cause an undue hardship, which is a tough standard to meet, although not impossible in every situation.
Bankruptcy Lawyer Free Consultation
When you need legal help with a bankruptcy in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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