By Dennis L. Plank, Attorney
While debt is frequently the result of poor money management and overspending, many times financial hardships come from circumstances out of our control, such as layoffs, job loss, and unexpected medical expenses.
In these unprecedented times, even those who are careful with their finances may find themselves struggling with unexpected debt. There are a number of options for debt relief, and one of them is bankruptcy. Choosing the right option can be a daunting task. While many of them have benefits, they also have consequences. Consulting a bankruptcy lawyer is often a wise first step. An experienced Lancaster bankruptcy attorney can help individuals understand their unique financial circumstances and which form of debt relief is right for them.
Chapter 7 and Chapter 13 bankruptcy offer different avenues of debt relief. While some may view filing for bankruptcy as a sign of failure, it is often the best option for a fresh financial start. However, it’s not for everyone. For those wondering if they are a good candidate for bankruptcy, here are some important points to consider.
Consider Filing for Bankruptcy in Lancaster County Under These Circumstances
Items Can’t be Sold to Settle Debts
When people are struggling to get out of debt, especially due to job loss, medical bills, or divorce, it often means they don’t have the income or savings to cover their expenses. One way to pay off that debt might be to sell assets that have some significant value.
Sometimes, however, there are no valuable assets to sell, or the assets are essential to well-being, such as a home or car. There are other things to consider as well before selling assets. Selling retirement assets, for instance, may come with expensive tax implications and threaten financial security down the road. Additionally, liquidating other assets may make little sense if they won’t make a significant dent in the accumulated debt. In these cases, filing for bankruptcy may be an option to consider.
Although Chapter 7 bankruptcy requires that a trustee of the bankruptcy estate sell assets to pay off creditors, oftentimes those who file for bankruptcy have few assets to sell. Even when they do, both Pennsylvania and federal bankruptcy laws have exemptions that allow Lancaster County filers to protect some assets, such as their primary home, essential vehicle, workers’ compensation or disability insurance benefits, pension, and more. Those who have non-exempt assets that they don’t want to part with, such as jewelry, hobby equipment, or collections, and who have fallen behind on debt tied to assets such as a car loan or mortgage, may want to consider Chapter 13 bankruptcy. Chapter 13 allows those with sufficient income to create a three- to five-year repayment plan based on their income.
Creditors are Threatening to Repossess
For those who are facing collection calls, lawsuits, and wage garnishments, filing for bankruptcy may be the best way to get immediate relief, especially if there is no sign of financial improvement in the future. Once someone files for bankruptcy, a Lancaster bankruptcy lawyer can activate an automatic stay that will stop collections and prohibit creditors from pursuing any collection activity, including phone calls, attachments, and the filing of lawsuits.
Declaring Chapter 7 and Chapter 13 Bankruptcy may not be Possible Under These Circumstances
Non-Essential Assets can be Sold to Settle Debts
For those who have valuable assets they can sell without severe tax penalties or future financial hardship, it often makes financial sense to liquidate those assets rather than file for Chapter 7 or Chapter 13 bankruptcy. Such assets might include antiques, jewelry, or vehicles not tied to an existing loan.
Downsizing to a smaller home may also be an option, but it is important to calculate any fees and selling costs. Always research the market value of any assets and ensure that selling the assets will cover the debt.
Additionally, filing for bankruptcy has long-lasting consequences. Depending on a debtor’s credit score prior to filing for bankruptcy, it could drop by 100 points or more. Chapter 7 bankruptcy remains on a credit history for 10 years, making it more difficult to get low interest rates on any future loans. For people who can relieve or eliminate debt by selling non-essential assets, this can be a more favorable solution. An experienced Lancaster bankruptcy lawyer can help make that decision.
Filer Doesn’t Meet Pennsylvania’s Bankruptcy Requirements
Bankruptcy is a big decision, but for some people, state requirements make that decision for them. Not everyone qualifies to file for Chapter 7 or Chapter 13 bankruptcy. Debtors must take a means test to compare their monthly income to the average in Pennsylvania. If their income is higher, they will not qualify for Chapter 7. The test will also determine if they have enough disposable income to pay back their debt, in which case they may be able to file for Chapter 13.
However, Chapter 13 has its own financial requirements, including having secured debt of no more than $1,184,200 and unsecured debt under $394,725. Pennsylvania also requires that those who file for Chapter 7 or Chapter 13 bankruptcy are residents of the state for at least 91 out of the last 180 days before the filing date. Candidates for either type of bankruptcy must prove that they have completed credit counseling within the last 180 days.
Tax Debt or Student Loan Debt
Chapter 7 bankruptcy is often the right choice for someone who has a lot of unsecured debt, or debt not tied to an asset such as a home or car. Unsecured debt includes things like credit card debt, medical bills, or personal loans, and the major benefit of Chapter 7 bankruptcy is that it wipes out that type of debt, offering a fresh financial start.
For those with primarily secured debt, Chapter 13 bankruptcy is often a better option. Unlike Chapter 7, Chapter 13 bankruptcy won’t wipe out debt, but it will allow someone to prioritize debt and create a repayment plan based on income.
However, neither form of bankruptcy will forgive or reduce student loans or unpaid taxes. If they make up the bulk of one’s debt, bankruptcy is not a helpful option.
Still not sure if filing for bankruptcy is the best option for debt relief? Consult with a Lancaster bankruptcy attorney experienced in bankruptcy law. Contact the Law Offices of Going and Plank in downtown Lancaster for a free consultation. We review each client’s unique situation and help them determine the best solution to put them on a path toward a better financial future. For those who choose Chapter 7 or Chapter 13 bankruptcy, we can guide them through the complicated filing process, activate an automatic stay, and help them find immediate debt relief.
Learn more about bankruptcy options in Lancaster County in these articles.