Bankruptcy. Your Worst-Case Scenario? Not Necessarily!

While we all want to pay back our debts, sometimes life gets in the way. Especially now, with the unprecedented effects of COVID-19, some of us find ourselves with very few options. My experience is that most people who are seeking bankruptcy protection did not set out to find themselves in a situation where bankruptcy was the best option. And sometimes, because of that or of the pride of previously paying back their debts in full- and on-time, people delay the consideration of bankruptcy until the very last second.

I would be kidding you if I said it was an easy decision to file and that Bankruptcy is for everyone. But, in troubled times I encourage clients to at least evaluate the option of bankruptcy as one of the alternatives they are considering, before it becomes their only option.

A well-timed bankruptcy can help keep your 401(k) or other retirement plan and the equity in your home intact. Further, while it is sometimes hard to imagine yourself on a sinking ship, bankruptcy is sometimes inevitable and by moving it forward in the process helps you keep some of what you have worked so hard to build.

Some of the questions I hear regarding bankruptcy follow:

But will it ruin my credit? Bankruptcy, in most circumstances, will have a negative impact on your credit score to be sure. However, so do collections and past due bills. The difference is, after a discharge in bankruptcy, you will generally see your scores start to improve over time. In fact, many lenders are very interested in lending to people who have just been discharged because they feel that you will have the funds to pay them back.

Will they take my home? Almost assuredly no. The bankruptcy code allows substantial exemptions for equity in homes, meaning, creditors cannot in most circumstances, seek to have the home sold to repay them.

Will they take my car? A skilled attorney can help you take legal actions to protect as much of your property as possible. Don’t fall into these traps. Consult a bankruptcy attorney now.

Will they take my business? There is no bright line answer to this question. rather it is fact and situation specific. However, a skilled attorney can help you assess this question quickly and cost effectively.

My neighbor filed his own Bankruptcy papers, I can do it myself, right? You just fill in the blanks on some forms, right?  NOT SO FAST. The bankruptcy code is complex and ever-changing, and it takes significant and ongoing study to stay abreast of the changes in the bankruptcy code. Just because you can file your own bankruptcy papers, doesn’t mean you should. Exemptions are one example of where if you don’t understand the law you might miss exemptions that allow you to keep most or all of your property. Worse yet, you unintentionally fail to report certain transactions or assets and you find yourself trying to explain yourself to the Court.

Should I take out a home equity loan to “consolidate my credit debt?” There is no one-size fits all answer to this question, but experience has shown that some people who take out a home equity loan to pay off their credit cards, end up maxing out their credit cards again, and find themselves without any equity in their home and facing bankruptcy as their only alternative. Perhaps you are better off negotiating your credit card debts with the lenders, or perhaps, you should file bankruptcy, get a fresh start and preserve the equity in your home.

As I think this post conveys, bankruptcy is not for everyone, and it certainly isn’t right for every situation, but if you are experiencing financial struggles, I encourage you to consult an attorney for the purpose of assessing your options before you run out of options.

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