By Dennis L. Plank, Attorney
People file for bankruptcy for many different reasons. Medical expenses, job loss, excessive use of credit, divorce and separation, and unexpected expenses are just a few reasons Lancaster County residents might choose this option to manage debt. And while some people can stop debt from spiraling out of control before bankruptcy is necessary, others cannot stabilize their financial situation without professional help.
If debt is overwhelming, filing for bankruptcy may be a huge help. Bankruptcy can bring a fresh financial start, but it comes with serious consequences that Lancaster County residents should understand.
Is Chapter 7 or Chapter 13 Bankruptcy Best?
Chapter 7 and Chapter 13 are very different. Chapter 7 is the best choice when the majority of debt is unsecured (not tied to collateral like a vehicle or home).
In Chapter 7, a filer must make less than Pennsylvania’s median income (currently $63,463) and have Pennsylvania residency. They must complete credit counseling. Chapter 7 bankruptcy provides substantial debt relief and forgiveness for personal loans, medical bills, or credit card bills. That relief may be partial, but in some instances, it can entirely eliminate debt. A qualified Lancaster County debt attorney can file Chapter 7 bankruptcy to stop collector phone calls and threatening letters.
Chapter 13 bankruptcy might be a better choice when there is a risk of losing a home to foreclosure. Unlike Chapter 7, it does not require the filer to liquidate all their assets and even protects some assets such as a primary vehicle or house. Chapter 13 bankruptcy renegotiates and reorganizes the debt to create a payment plan based on income that allows the filer to pay down debt over 3 to 5 years. Chapter 13 is also best for cases when the sale of major assets (e.g., a vacation home, an extra vehicle, a boat) will not completely cover the debt.
An experienced Lancaster County debt lawyer can help determine what course of action is suitable for each individual and which assets should be sold or kept protected.
Can Bankruptcy Help With Student Loans?
Unfortunately, neither Chapter 7 nor Chapter 13 bankruptcy are good options to deal with student loan debt. Neither type of bankruptcy permits the forgiveness (or even renegotiated payment) of student loans. However, there are a handful of specific, rare exceptions. An individual must demonstrate that paying their debt back will “impose an undue hardship on you and your dependents. In most Pennsylvania courts, exceptions must pass the Brunner Test. The Brunner Test requires proving to a court that:
- The individual cannot maintain a “minimal” standard of living for themselves and their dependents, based on their current income and expenses.
- There are additional circumstances that mean this situation will continue for a significant portion of the student loans’ repayment period.
- The filer has tried to repay the loans in good faith.
Exceptions may exist if the borrower went to a fraudulent school or did not benefit from the education in any significant way. The court will also evaluate if the filer has reached their maximum earning potential and or if they are stuck in a “cycle of poverty.”
What are the Consequences of Filing for Bankruptcy?
Filing may solve many financial issues, but there are consequences. First, it can cause the filer’s credit score to plummet, reducing their credit score by 20 to 25%. Secondly, bankruptcy may require the sale of significant assets.
Is Bankruptcy the Right Choice?
Many different factors need to be weighed before filing for bankruptcy, and not all are covered in this article. However, an experienced Lancaster bankruptcy lawyer can help decide if bankruptcy is indeed the right choice for them. They know what questions to ask to find out if filing bankruptcy will benefit an individual. All the complex variables can be hard to balance, so Lancaster County residents struggling with overwhelming debt should contact Going and Plank’s expert debt lawyers for a free consultation. We help our clients review all the debt relief options available and map out the best path forward to a brighter financial future.
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