Do’s and Don’ts About When You Should File
The truth is nobody wants to file for bankruptcy. Filing generally means you are facing an insurmountable level of debt, which is never a pleasant experience. However, bankruptcy is a powerful tool that helps facilitate significant financial relief. It equips you to restructure and even relinquish portions of your debt. It can be a lifesaver for individuals and families thrust into unprecedented and unplanned situations.
Not everyone should necessarily file for bankruptcy, though, and timing is important. Strategizing on how best to leverage bankruptcy is key to getting your life back on track. Individuals tend to qualify for either Chapter 7 bankruptcy, which involves liquidation of assets, and Chapter 13 bankruptcy, which restructures debt into more sustainable, manageable payments over a multi-year period. Successfully completing either process generally allows individuals to discharge their unsecured debts, which can substantially improve one’s financial outlook.
Below, we cover some of the circumstances that should compel you to consider bankruptcy. We also review some situations where you should think twice before filing and actions you should not take if you are considering bankruptcy in the future.
When You Should Consider Filing
There are a number of potential scenarios where filing for bankruptcy might make sense. Every situation is different, and you should always consult a qualified attorney before filing.
You Have Lost Your Job
The United States is experiencing an unprecedented level of unemployment as a result of mandatory business shutdowns and other economic consequences of the COVID-19 pandemic. While government stimulus did help stymie initial effects, mass job furloughs in many industries are now turning into permanent layoffs as the effects of the pandemic continue.
If you have lost your job and are struggling to make ends meet, you may soon be in a position where bankruptcy is a viable option. This can be especially true in situations where unemployment and other government benefits are insufficient in covering any higher salary you previously made. While you can adjust your spending in the short-term to avoid unnecessary extravagancies like eating out, you may already be locked into certain fixed expenses for your home or vehicle. For many people, these expenses increase with your salary, as you tend to move into nicer residences with higher monthly rent or lease payments as you make more money.
If it becomes clear you will not be able to find a similar level of employment for some time, bankruptcy could become an essential failsafe. You will still be obligated to pay your fixed expenses and any necessities on little to no income, which can quickly lead to the compounding debt you want to avoid.
It is worth pointing out that it may be worth waiting to file for bankruptcy if you previously made a high level of income. The Ohio Means Test decides whether you qualify for Chapter 7 or Chapter 13 bankruptcy, and one of the main determining factors is your level of disposable income. If your income exceeds the median income in the state for your household size, you may only qualify for Chapter 13. However, only the past 6 months of your income is evaluated, meaning you could soon qualify for Chapter 7 bankruptcy if you wait for your average income to drop after losing a job.
Chapter 7 bankruptcy can be preferable to Chapter 13 bankruptcy in some situations. When filing Chapter 13, you are agreeing to consolidate and restructure debt into a single repayment plan approved by a bankruptcy court for a period of 3-5 years. You will still likely get to discharge unsecured debts if you make your payments, but you will be on the hook for a great portion of your debt – even if you feel you do not have the means to pay it. Chapter 7 bankruptcy liquidates instead of restructures, which can sound scary – you probably do not want to lose your car or house – but an experienced bankruptcy lawyer can strategize state or federal exemptions to minimize your actual losses. Consult an attorney to see which bankruptcy type might be most advantageous to your situation.
Your Wages Are About to be Garnished
If you have been sued by a creditor, they can obtain a wage garnishment order from the local court. The creditor then contacts your employer to initiate the wage garnishments. It is very important that you contact a bankruptcy attorney immediately, because the automatic stay of the Bankruptcy Code can stop a wage garnishment and any garnishments made after filing for bankruptcy must be returned to you. If you are already under garnishment and the creditor has taken between $600-$1,300, there is a way to get those garnishments refunded to you because they are considered a preferential transfer. Contact an experienced bankruptcy to learn if this is possible in your situation and to stop the wage garnishments.
You Are Paying for Essentials with Credit Card Debt
Regardless of your employment situation, if you are paying for basic necessities exclusively or almost exclusively with credit cards, you are likely in a precarious financial situation. There is nothing wrong with credit cards so long as you make the full monthly payments on-time. Making only partial payments or the minimum payment quickly racks up debt that can be difficult to overcome.
Remember, credit card debt usually carries an exorbitant interest rate, meaning even a small amount of debt could quickly balloon if not paid back promptly. If you do not have sufficient means to regularly keep up with basic essentials without resorting to credit cards, you may be suffering from financial insecurity.
Credit card debt is considered an “unsecured” debt, meaning it is eligible for discharging after completing Chapter 7 or Chapter 13 bankruptcy. If you have what seems to be an insurmountable level of credit card debt, you should consider speaking with a bankruptcy lawyer to see if filing could get your debt under control.
You Are Drowning in Medical Bills
An unanticipated trip to the hospital as a result of a severe injury or medical condition can almost instantly place you deep in debt. Costs of medical care are sky high, and even a brief stay can accumulate more than some can reasonably pay. If you were already struggling to make ends meet, the prospect of another monthly cost may seem daunting if not impossible.
Medical bills are another type of unsecured debt, so it can be discharged once you successfully go through Chapter 7 or Chapter 13 bankruptcy. This can be especially helpful in situations where a chronic illness or extended hospital stay has generated an absurd level of debt you could not possibly hope to repay.
You Are Experiencing Credit Collections Calls
If you are receiving frequent or ceaseless calls from creditors looking to collect on your debt, it may be time to consider bankruptcy. Collections agencies will typically only aggressively pursue debts if complaints have been filed, which happens when a payment is egregiously overdue.
In other words, if you are receiving creditor calls, you are probably in trouble with at least one or more line of credit. There are specific rules about when and how creditors are permitted to contact you, but you still may face relentless calls, letters, and even in-person visits.
Filing for bankruptcy puts a stop to collection calls. Once you formally file for either Chapter 7 or Chapter 13 bankruptcy, the court will promptly issue an automatic stay, which bars any further collection actions, including communications from creditors. Another means of stopping creditor calls is through hiring legal representation: Once a creditor has been informed you have a lawyer, they are required to contact them, not you.
More importantly, bankruptcy helps many people get on top of their finances. The goal is not only to wipe away unsecured debts: Bankruptcy is meant to set you up for success, giving you the tools to avoid further debt problems in the future.
You Are About To Lose Your Car or Home
Foreclosure or repossession can be scary, especially if it means you might become homeless or unable to reliably transportation to your job. While you should consider all of your financial relief options, bankruptcy can be used in some scenarios to freeze foreclosures or repossessions. The automatic stay, which initiates as soon as you formally file with the court, also stops any foreclosure or repossession efforts from proceeding. The automatic stay of Chapter 7 can give you invaluable time to relocate from your home. The automatic stay of Chapter 13 bankruptcy can give you an opportunity to save your home and car by catching up on mortgage and car loan payments over 3-5 years.
What You Should Avoid Doing When Considering Bankruptcy
There are certain actions that are inadvisable when considering bankruptcy. Others are likely to trigger a rejection from a bankruptcy court.
Do Not Touch Retirement Accounts
It can be tempting to pull funds from your 401(k), Roth IRA, or any other type of retirement savings account if you are struggling to pay off debts. However, you should under no circumstances liquidate these accounts if you are considering filing for bankruptcy. You should also not make any major moves to pay off a particular creditor before filing.
Your finances will be scrutinized in bankruptcy court, and the bankruptcy code prohibits you from showing preference to any given creditor. Liquidating a retirement account to pay off a debt before filing for bankruptcy violates this clause and may also be deemed to be “bad faith” by the Bankruptcy Court which could lead to your bankruptcy petition’s rejection.
Most types of retirement accounts are also protected from both Chapter 7 and Chapter 13 bankruptcy. They more broadly cannot be touched by creditors, and funds within them are exempt from any liquidation. So if you can avoid withdrawing funds from retirement accounts, then you can get a fresh start in bankruptcy and still leave your retirement funds in tact for the future.
Do Not Give Property or Funds to Friends or Family
Some people try to be sneaky and transfer critical pieces of property – like, say, the deed to a piece of land or a title to a car – in the hopes of it escaping bankruptcy liquidation. This practice is not allowed by the bankruptcy code. Because a full and honest financial disclosure is required when filing for bankruptcy, it will almost certainly be discovered when your financial records are being reviewed. You may not transfer any piece of property for the purposes of sheltering it from bankruptcy.
Do Not File Without Consulting a Bankruptcy Attorney
If you are not intimately familiar with the bankruptcy code, you should not file either Chapter 7 or Chapter 13 bankruptcy without first consulting with a skilled lawyer. Not only will you potentially make avoidable mistakes on your filing that could lead to rejection, you may also fail to optimize your estate should a bankruptcy move forward. Failing to strategize on exemptions, for example, could lead to your losing more property to liquidation than what was necessary.
Our bankruptcy attorney at The Southard Law Firm, L.L.C. takes a client-focused approach to bankruptcy. We will work with you to determine if bankruptcy is the right choice for your financial situation, determine for which type you qualify, and assist in the preparation of your application materials. Then, we will represent you in bankruptcy court and prepare your estate to both minimize losses and get you the most out of the process. We can help determine when the time is right to file and what mistakes to avoid.
Get experienced help with bankruptcy by calling (513) 399-8806 or contacting us online.