By Dennis L. Plank, Attorney
Lancaster County residents can take important steps to manage debt, but sometimes that debt snowballs out of their control, and bankruptcy is the best option. Chapter 7 and Chapter 13 are two forms of bankruptcy that can offer individuals financial relief. Chapter 7 focuses on debt forgiveness, while Chapter 13 focuses on reorganizing and repaying debt.
Filing for bankruptcy can bring substantial relief and a fresh financial start, but it carries consequences. It is important to consult with a Lancaster bankruptcy lawyer to explore all possibilities for debt relief. A bankruptcy attorney can look at someone’s full financial picture, including the type of debt, income, and many other factors, to see if bankruptcy is an option and if it’s the right option.
For individuals who feel overwhelmed by debt, here’s a quiz to determine if Chapter 7 (or Chapter 13) bankruptcy might be a good idea.
Q.Is Most of the Debt a Tax Debt?
- If the answer is yes, then Chapter 7 may not be not a good option. Chapter 7 can forgive many types of debt, but not unpaid taxes. It also won’t keep debtors from paying alimony and child support. There are very specific circumstances, however, where bankruptcy may discharge tax-related debts, but those circumstances only apply to income taxes. An experienced Lancaster County bankruptcy lawyer can review financial statements and determine whether tax forgiveness is possible.
Q. Is the Debt From Student Loans?
- If the answer is yes, then Chapter 7 bankruptcy is probably not a good option. Neither is Chapter 13. Neither form of bankruptcy generally allows for the forgiveness or renegotiated payment of student loan debt. However, there are rare exceptions. A debtor who files for either form of bankruptcy can have a bankruptcy lawyer file a separate action that asks the court to find that repaying a federal student loan would cause undue hardship. The court will look at several factors when weighing such a request.
Q. Is the Majority of the Debt Unsecured?
- If the answer is yes, then Chapter 7 bankruptcy may be a good option. Chapter 7 bankruptcy can wipe out unsecured debt that is not tied to collateral such as a home or vehicle. Chapter 7 offers debtors who are saddled with credit card bills, medical bills, or personal loans the opportunity for substantial debt relief by forgiving debt, sometimes without the need for repayment.
Q. Can the Sale of Major Assets Like a Boat, Extra Vehicle, or Vacation Home Settle Debts?
- If the answer is yes, then Chapter 7 bankruptcy is probably not a good option. As long as a debtor is willing to part with those assets, and they will provide enough income to clear their debt, it is better to settle those debts than to declare bankruptcy. If selling nonessential assets won’t resolve the debt issues, then Chapter 13 bankruptcy may be a better option. People who file for Chapter 13 bankruptcy can submit a repayment plan for their debts that safeguards their assets from repossession or foreclosure. A Lancaster bankruptcy lawyer can help determine which assets a person may be able to keep and which they will have to sell.
Q. Does the Debtor Have Funds Set Aside That They Are Not Using?
- If the answer is yes, then Chapter 7 bankruptcy may not be a good option. Debtors should use those funds to pay off their debts unless those funds will only cover a fraction of what they owe. While Chapter 7 offers a fresh financial start, debtors should not take it lightly. Filing for Chapter 7 bankruptcy can drop a credit score by 100 points or more, and it will remain on a credit history for 10 years, making it harder to get lower interest rates on future loans.
Q. Is There a Danger of Losing a Lancaster County Home to Foreclosure?
- If the answer is yes, then bankruptcy could be a good option. Filing for bankruptcy will stop any foreclosure proceedings. Although Chapter 7 requires liquidation of assets, Pennsylvania has exemptions that allow for the protection of certain assets, including a home and primary vehicle. If most of the debt is secured debt tied to an asset, such as a mortgage, Chapter 7 won’t help, but Chapter 13 may be a wise decision. Chapter 13 negotiates and reorganizes debt and creates a three- to five-year repayment plan based on income. Debtors often end up repaying only a percentage of what they owe.
Q. Is the Debtor’s Income Below the Current Median Income in Pennsylvania?
- If the answer is yes, then Chapter 7 bankruptcy might be a good option. Pennsylvania residents considering Chapter 7 bankruptcy must take a means test to qualify, and their income must be below the current standards set by the state. That income varies depending on the size of the household. In addition to passing the means test, Chapter 7 applicants must also establish Pennsylvania residency and complete credit counseling to determine if Chapter 7 bankruptcy is really the right choice for them.
Q. Are Collectors Calling and Threatening Lawsuits and Wage Garnishment?
- If the answer is yes, Chapter 7 bankruptcy may be a good option, especially if there is little possibility of an improved financial situation in the near future. Once a Lancaster County bankruptcy lawyer files for bankruptcy on someone’s behalf, they can activate an automatic stay that stops collections and prohibits collectors from pursuing any collection activity, including telephone calls, attachments, and the filing of lawsuits.
Q. Is the Debtor Using Retirement Assets to Pay Off Debt?
- If the answer is yes, bankruptcy could be a wise option. Withdrawing retirement assets early has two main drawbacks. People who draw on their retirement funds too early face hefty penalties, plus they also have to pay income taxes on the funds, which simply adds to their debt. Additionally, those early withdrawals chip away at the retirement nest egg, creating more financial hardship in the future. Filing for bankruptcy can not only save people from dipping into their retirement funds, but it can also protect those retirement assets from creditors.
Many factors go into the decision to file for bankruptcy. An experienced Lancaster bankruptcy attorney knows the questions to ask to determine if bankruptcy is the right choice and, if so, which type of bankruptcy makes the most sense for a debtor’s individual situation. Lancaster County residents who are struggling with debt can contact the Law Offices of Going and Plank to review all of their debt relief options and put themselves on a path to a better financial future.