By Dennis L. Plank, Attorney
Lancaster County residents who are feeling crushed by job loss, unexpected expenses, or mounting bills may feel there is no way out of their financial troubles. But there are legal options for debt relief, and one of them is bankruptcy. Filing for bankruptcy is not for everyone, but for some, it can be the right choice for a fresh financial start. These ten steps can help people determine if bankruptcy makes sense for them.
One: Identify the Type of Debt
When someone is drowning in financial trouble, and the bills keep piling up, it might seem like all debt is the same, but it’s not. People who are contemplating bankruptcy need to identify the type of debts they have since that can help determine what type of bankruptcy might make the most sense or whether bankruptcy makes sense at all.
Unsecured debt is debt that is not tied to an asset. It includes things like credit card bills, medical bills, personal loans, and unpaid utility bills. On the other hand, secured debt is tied to an asset, such as a home mortgage or car loan.
Bankruptcy may be an option for individuals with unsecured, secured debt, or a combination of both. However, there are certain types of debt that Pennsylvania bankruptcies rarely eliminate, including child support, alimony, student loans, and tax debt. Filing bankruptcy may not help if the bulk of debt falls into one of those categories.
Two: Determine Whether You’re Judgment-Proof
State and federal laws have safeguards in place to ensure that debtors are not left penniless or homeless when repaying their debt. These safeguards include limits on what a creditor can seize, even if a court judgment is in place. The courts may consider a person’s judgment proof if they do not have enough income or assets to cover a court judgment against them.
Certain income is also judgment-proof, meaning a collection agency cannot attempt to garnish it. Typically, judgment-proof income includes state and federal funds, such as Social Security, Supplemental Security Income, veterans benefits, federal employee and civil service retirement funds, and money received for child support or alimony. Federal law sets limits on the percentage of disposable income a creditor may seize in a judgment.
In Pennsylvania, those limits are even more strict. If someone is judgment-proof, filing for bankruptcy may not be helpful unless they anticipate a better job or an improved financial situation in the near future. A Lancaster bankruptcy attorney can help people evaluate their situation.
Three: Determine Your Chapter 7 and Chapter 13 Eligibility
Chapter 7’s primary benefit is its ability to eliminate unsecured debt, giving people a fresh financial start. Chapter 13 is a way to reorganize debt into more manageable payments. But simply having a mountain of unsecured debt is not the only qualification when it comes to filing for Chapter 7 or Chapter 13.
Income requirements are a major factor in determining whether a person should declare Chapter 7 or Chapter 13. For that reason, Lancaster County residents contemplating Chapter 7 bankruptcy must take a means test to compare their monthly income to the average in Pennsylvania. Income must fall below a certain level, which varies depending on the size of the household.
Four: See if Negotiating With Creditors is an Option
For some, bankruptcy is the only option and a wise move to get back on solid financial footing. However, bankruptcy is a serious decision that carries several ramifications, including damage to credit history and the potential loss of assets.
If you have not tried to negotiate with creditors to establish a manageable repayment plan or a lump sum settlement, do so before contemplating bankruptcy. Not every creditor is willing to negotiate, but depending on the circumstances, some may see it as a better option than never getting paid at all. Negotiating with creditors may make sense for those who have only a few creditors, who can quickly pay a reduced rate, or whose financial difficulties are only temporary.
Five: Look Into Selling Valuable Property
When someone experiences financial trouble, selling valuable property is often a practical alternative to filing for bankruptcy, especially if they use the proceeds for essentials like groceries, medicine, clothing, and rent – or even to pay off debt.
However, selling certain items to purchase others, especially right before filing for bankruptcy, can be problematic. Certain assets in Pennsylvania are exempt from bankruptcy proceedings, meaning the trustee in the bankruptcy case can’t sell them to pay off creditors. Debtors can get themselves into trouble, for example, if they sell off non-exempt luxury assets and use the proceeds to buy protected exempt assets before filing for bankruptcy. Depending on when the debtor sold the assets, the sale price, and how the proceeds were used, a court may view the action as an attempt to avoid paying creditors.
Six: Explore Chapter 7 and Chapter 13 Bankruptcy
Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy does not entirely wipe out the debt. Instead, it focuses on a manageable plan for debt repayment. For those who have fallen behind on secured debt, such as a mortgage or car loan, Chapter 13 bankruptcy can renegotiate and reorganize the debt, typically with a three- or five-year plan for repayment based on the applicant’s income.
While Chapter 13 does not forgive the debt, it does prioritize it. Since the repayment plan is income-based, debtors often only pay back a percentage of their total debt. Perhaps most importantly, Chapter 13 allows filers to keep their home and other possessions while stopping lawsuits and creditor harassment.
Seven: Make Sure Pennsylvania’s Residency Requirements are Met
Although Pennsylvania bankruptcies are governed by federal law, each state has its own set of rules and exemptions regarding what property is legally protected and how bankruptcy laws are interpreted. Although a debtor might find it more beneficial to file bankruptcy in one state rather than another, they must meet certain residency requirements.
If a Pennsylvania resident has lived in the commonwealth for fewer than two years, then they must file bankruptcy in the state where they have lived at least 91 out of the 180 days preceding the filing date. Lancaster County residents are in the jurisdiction of the United States Bankruptcy Court for the Eastern District of Pennsylvania.
Eight: Understand Pennsylvania Bankruptcy Counseling Requirements
Debtors in Pennsylvania cannot file for bankruptcy until they prove they have completed credit counseling within the previous 180 days. Credit counseling is a federal requirement that helps debtors review the types of debt they have along with other debt management options for relief so they can determine if filing bankruptcy is the right choice for them.
Once someone files for bankruptcy, they must take a second, debtor education course that covers financial management strategies, such as creating a budget and improving credit. Failure to meet counseling requirements will result in the dismissal of a bankruptcy case.
Nine: Learn Pennsylvania Bankruptcy Filing Requirements and Benefits
Credit counseling isn’t the only requirement for filing a Lancaster County bankruptcy. Filing for bankruptcy in Pennsylvania involves gathering financial documents and completing extensive and often complex paperwork outlining finances, debts, assets, income, expenses, and property transactions. Examining this information can also help determine whether Chapter 7 or Chapter 13 bankruptcy is the best option.
Chapter 7 makes more sense for Lancaster County residents with lower incomes, few assets, and a lot of unsecured debt, such as credit card debt. Chapter 13 bankruptcy may be beneficial for those who are struggling with secured debt, like mortgages, and who have disposable income that allows for a manageable debt repayment plan.
Couples will need to evaluate the benefits of filing a joint bankruptcy compared with individual bankruptcy. Couples who file jointly in Pennsylvania can double their exemptions and save on court filing fees. However, filing individually may make more sense if one spouse holds much of the debtor if one spouse separately owns many unprotected assets. An experienced Lancaster bankruptcy attorney can help wade through the financial complexities and determine the best option.
Ten: Hire an Attorney Experienced in Lancaster County Bankruptcies
An experienced Lancaster bankruptcy lawyer can help clients before, during, and after a Pennsylvania bankruptcy filing. A bankruptcy lawyer can review a client’s financial situation and help them determine whether bankruptcy or alternative forms of debt relief make more sense.
Once a client chooses bankruptcy, a Lancaster bankruptcy attorney can activate an automatic stay that will immediately stop collections and prohibit creditors from pursuing any collection activities, including phone calls, attachments, and filing lawsuits. A bankruptcy attorney will also handle the complicated filing process, protect assets, create a structured payment plan to pay off any remaining debt, and help clients plan a more secure financial future.
Lancaster County residents contemplating bankruptcy can find the guidance they need at the Law Offices of Going and Plank in downtown Lancaster. Contact Going and Plank today to discover the best path to debt relief.
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