By Dennis L. Plank, Attorney
For some people, bankruptcy is an effective way to manage or eliminate debt, but it’s not the best option for everyone. In fact, many people don’t qualify for bankruptcy. Some may find that bankruptcy will not address their most pressing debt needs. Determining if bankruptcy is the right option can be confusing. So, we’ve compiled a short quiz to help readers determine which benefits bankruptcy does (or doesn’t) offer.
One: Are Collectors Calling or Threatening to sue?
If the answer is yes, debt is a real issue that deserves immediate attention. If the creditor is unwilling or unable to work with the debtor to create a manageable repayment plan, bankruptcy may be a viable solution. Once bankruptcy is filed, a bankruptcy lawyer can activate an automatic “stay,” which stops collections and prohibits creditors from pursuing any collection activity, including telephone calls, attachments, and the filing of lawsuits.
Two: Are Retirement Assets Being Liquidated to pay Debts?
When money is tight, some people draw from retirement funds or liquidate them entirely. However, retirement assets are intended to provide security for the future. Filing to protect retirement accounts from creditors as part of bankruptcy might be a way to preserve retirement income.
Three: Are Loans Being Used to pay Bills?
Some people get unsecured personal loans to pay off higher-interest debts. Others take out loans tied to collateral such as a car or home equity loans. However, borrowing to pay off debts is a risky strategy, especially if it could result in the repossession of primary vehicles or homes. In bankruptcy proceedings, manageable payment schedules are developed that allow filers to repay debt without borrowing.
Four: Is There a Danger of Losing a Home?
If a homeowner falls behind on mortgage payments, some creditors will threaten to repossess the property. In these cases, Chapter 13 Bankruptcy may be a good option. This type of bankruptcy allows filers to catch up on late payments through a court-approved repayment plan. Chapter 13 filings rarely jeopardize the continued ownership of a primary residence or a primary vehicle.
Five: Does the Filer’s Household Income Meet State Requirements?
The Pennsylvania median income is a primary factor in determining whether a PA resident may file for bankruptcy under Chapter 7 or Chapter 13. That income limit varies based on household size. As a rule, households with lower income levels are more likely to qualify for Chapter 7, eliminating debt. Households with higher income levels tend to be eligible for Chapter 13, which renegotiates and reorganizes debt and creates a repayment plan. A filer may not qualify for bankruptcy if they have sufficient income to manage the existing debt or if the filer has non-essential, high-value assets (such as a vacation home, investments, recreational boat, or second or third vehicle) that could be sold to satisfy financial obligations.
Six: Is the Majority of the Debt Unsecured?
If debt isn’t tied to collateral such as a home or vehicle, it is considered unsecured. For example, personal loans, credit card bills, and medical expenses are all unsecured debt. In some cases, Chapter 7 can wholly eliminate unsecured debt. However, it’s important to note that taxes owed and student loans can’t be eliminated through bankruptcy.
Seven: Is the Majority of the Debt Tied to a Mortgage or Vehicle Loan?
In bankruptcy proceedings, Pennsylvania law protects certain assets, like a home or a primary vehicle. This means homeowners can file for bankruptcy to protect a house or car, even if it is in foreclosure or being repossessed. Chapter 13 is a type of bankruptcy that allows filers to reorganize and negotiate debt, creating a three- to five-year plan to repay based on income. Under Chapter 13, debtors often end up paying only a percentage of what they owe.
Eight: Has the Filer Considered Selling Non-Essential Possessions?
Sometimes, selling a boat, an extra vehicle, or a vacation home can provide enough income to fully settle debts or repay overdue debt. However, if such sales will not satisfy past-due debt or will not remedy the long-term debt situation, Chapter 13 could be a way to create a negotiated repayment plan that protects assets from foreclosure or repossession.
Nine: Is the Filer Aware That Bankruptcy Will not Forgive Student Loans?
If most of a person’s debt is in the form of student loans, then neither form of bankruptcy allows for forgiveness of that debt. There are a few rare exceptions if a court agrees that repaying a federal student loan would cause undue hardship. There are several factors in consideration, and the best bankruptcy attorneys can make a big difference in presenting a case to the court.
Ten: Is the Filer Aware That Bankruptcy Does not Forgive tax Debt, Alimony, or Child Support?
When most of a person’s debt is from taxes, alimony, or child support, both Chapter 7 and Chapter 13 are unhelpful. There are a handful of circumstances where bankruptcy can discharge these types of debt, but they are exceedingly uncommon.
How Many “Yes” Answers did you Have?
Readers who answered yes to some or most of these questions may want to explore the viability of bankruptcy to help manage and eventually eliminate debt. To schedule a free consultation, contact Going and Plank today.
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