When should you consider bankruptcy?

by Joshua R. Karns on Jun. 11, 2020

Bankruptcy & Debt Bankruptcy & Debt  Bankruptcy Bankruptcy & Debt  Collection 

Summary: Bankruptcy can help both individuals and businesses that are having difficulty paying their debts. It could allow you to wipe out unsecured debts with high interest rates, save your home from foreclosure or substantially reduce the amount of money you will have to pay back to satisfy your debts in full. Many people could benefit themselves and their families by taking advantage of bankruptcy but deciding whether or not you should file for bankruptcy can be complicated.

Bankruptcy can help both individuals and businesses that are having difficulty paying their debts. It could allow you to wipe out unsecured debts with high interest rates, save your home from foreclosure or substantially reduce the amount of money you will have to pay back to satisfy your debts in full. Many people could benefit themselves and their families by taking advantage of bankruptcy but deciding whether or not you should file for bankruptcy can be complicated. You should consider filing for bankruptcy if:

  • You’re using credit cards for everything
  • You’re paying one credit card with another
  • Your interest rates have already gone up due to missed payments
  • You’re already working a second or third job
  • Your wages are going to be garnished
  • You have missed mortgage payments.
  • You’re considering taking money from retirement accounts to pay debt
  • A lien has been put on your home 

You should probably delay bankruptcy or avoid it completely if:

  • You only have a small amount of unsecured non-priority debts like credit cards and medical bills.  
  • You just want to stop collection agents from calling you.    
  • Most of your debts are from recent income taxes, court judgments, child support, or student loans. 
  • You don’t own a home, have few other assets and your only income is social security.

Should you file bankruptcy before or after divorce?

If you are in the middle of a divorce and considering bankruptcy there are a few things to keep in mind.  If you have credit card debt that you are trying to wipe out through bankruptcy you will have to pass the Chapter 7 means test.  The Chapter 7 means test uses the income of the entire household to determine your eligibility.  If your spouses income will prevent you from passing the Chapter 7 means test you may want to wait until after you have been divorced or living separate for enough time to pass the means test.  There are other issues to consider when divorce and bankruptcy intersect.  You should almost always consult with a bankruptcy attorney if you are in this situation.  

Should you file bankruptcy before or after you move?

Every state has at least one bankruptcy court with some having several.  When you file your bankruptcy case you will have to file it in the correct court.  The United States Bankruptcy Code’s statutes determine what court your case should be filed in based on where you have lived or where the majority of your property is located.  This could be crucial in your case if it will affect your ability to pass the means test or to exempt certain property.    

Should you file bankruptcy before or after you sell your home?

When you file your bankruptcy case you will have to complete and file your Statement of Financial Affairs.  In this document you will have to list all real estate that you have sold during the 2 years prior to the date your case was filed.  You must list who you sold the property to, the sale price and the estimated value of the property at the time it was sold.  If you file your bankruptcy case in Rhode Island the trustee can ask you about property that you have sold going back 4 years.  If the trustee finds that you sold your property for less than its value they can file a lawsuit against the buyer for the difference.  

Should I pay off a credit card I want to keep before I file bankruptcy?

When you file your bankruptcy case you will have to list all of your debts and creditors which includes all of your credit cards.  The credit card company gets notice of your bankruptcy and if the case proceeds and when you receive your discharge the account is officially closed.  You are not allowed to leave a credit card out of the bankruptcy with the intention of keeping it open after your case is closed.  If the credit card is paid in full however you do not need to list the credit card company because there is no debt.  The Statement of Financial Affairs also requires that you list all payments to a creditor that total $600 or more during the 3 months before you file.  If you have made large payment to a certain creditor during this time the trustee can take the payments back and divide the amount among all similar creditors.  This would delay your case and could cause other problems for your.  If you are considering bankruptcy you should get familiar with the Statement of Financial Affairs as soon as possible.  

Should I wait until my personal injury case is over to to file bankruptcy?

If you file a bankruptcy case you must list all of your assets.  If you have been injured and have a claim against someone it is considered an asset just like your car.  The value may be entirely unknown but it is considered personal property and must be listed.  Even if you have not retained a personal injury lawyer and have no intention of pursuing a claim it should still be listed.  If you wait until after your personal injury case is closed and have received money you will need to list that money in a few different places in your bankruptcy paperwork.  If you have money from a settlement or verdict you will have to list that in Schedule B along with your other personal property.  You will also have to list the money as income on your means test if you received the money during the six month means test time period.  Lastly, you will have to list it on your Statement of Financial Affairs as income received if received during the 2 years prior to filing.  If you have retained a personal injury attorney and are considering bankruptcy you should discuss the matter with them as soon as possible.  

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