Are there ever circumstances when you should not file for bankruptcy? Usually, if you have reached the point where you are talking to a bankruptcy lawyer, your financial situation is dire and you may conclude that your stress level is overwhelming and that you need Chapter 7 or Chapter 13 now.
After 25+ years of representing Atlanta area bankruptcy clients, however, I can tell you that in some instances, bankruptcy does not make sense and that your best move is to either wait before filing or to look for an alternative to the bankruptcy option. Sometimes the issue relates to timing and sometimes bankruptcy will not give you relief from the type of debt you have incurred.
Here are seven examples of situations where I would tell you to either hold off on filing or not to file at all:
1. When more debt is on the way. Stress and desire for peace of mind drive most people to file for bankruptcy and if you are sitting at your kitchen table looking at a pile of bills that you can’t pay, it may be tempting to call your bankruptcy lawyer and start the process. But will your debt situation get worse before it gets better? Before picking up your phone, ask yourself if the cascade of debt has really stopped.
- If your debt crisis is the result of medical debt and your condition has not yet stabilized, it probably doesn’t make sense to file bankruptcy until you know that you will not be facing more medical debt.
- If you have just lost your job and you don’t know if or when you will be re-employed, bankruptcy may be premature.
- If you are likely to need access to credit to survive in the short term, bankruptcy is probably not a good idea as you will not have ready access to credit for at least a year after you file, and perhaps longer.
2. When you expect a significant change of income. Bankruptcy works best when your financial situation is stable. If you expect a raise or a higher paying new job, it generally does not make sense to file bankruptcy since you will have to update your budget and income information to reflect a positive change in circumstances. If you foresee a lower income it usually makes sense to wait because the assumptions arising from your current income will no longer apply.
Similarly, if you expect to inherit money from a parent or relative, you could lose that inheritance if it occurs while you are in bankruptcy or even after your discharge. This problem is easily avoided if addressed in advance of your filing.
3. When you don’t owe that much. Filing bankruptcy is not cheap – a Chapter 7 will likely run well over $1,000 + a filing fee of more than $300. Chapter 13 will cost you between $3,000 and $5,000 + a filing fee of almost $300. It rarely makes sense to file bankruptcy when your total debt is less than $25,000 to $30,000.
4. When you are judgment proof. If you have no income or if you are on Social Security, and you own little or no property, there is little or nothing creditors can do to you, so why file? Many times, simply advising your creditors that you are “judgment proof” will prompt them to write off your debt and move on to other, more viable accounts.
5. When you don’t have a clear plan about what you hope to achieve by filing bankruptcy. You should always have a short term and a long term plan before you file for bankruptcy. How will bankruptcy make a difference in your life. If you have no idea what you will be doing or what you will be earning in the next 12 to 24 months, it probably makes sense to hold off on filing.
Although human beings are usually optimistic in nature, you should not assume that your financial picture will improve unless you have clear evidence to the contrary.
6. When most or all of your debt is non-dischargeable. Certain types of debts cannot be easily modified or eliminated in bankruptcy. These include such things as:
- child support
- some (but not all) student loans
- criminal restitution
- debt arising from a DUI
- credit card binge debt
- many types of tax debt
If your debts are non-dischargeable, filing bankruptcy may only buy you a few weeks or months of respite from aggressive collection activity. If you will have to litigate to obtain an order of discharge (i.e., student loans, tax debts, some support obligations) then bankruptcy may not be cost effective.
7. When you have engaged in activities that will likely result in expensive litigation and challenges to your bankruptcy. For example, if you recently doubled or tripled your credit card use, or made a big ticket purchase on a credit card (this is called “credit card binge debt”) you will likely face a challenge by the credit card lender or the trustee.
If you owe money to a creditor who has a personal vendetta against you, that creditor may challenge your bankruptcy and force you to spend money in litigation.
As a general rule, you should avoid any major financial changes in the year prior to filing bankruptcy. Even better, talk to your bankruptcy lawyer before making any major financial decisions – sometimes you can’t “undo” a pre-bankruptcy mistake.
Conclusion: like most federal laws, the United States Bankruptcy Code has become complex and complicated. Even a “good faith” mistake by a debtor prior to filing can have dire consequences – the loss of your bankruptcy discharge, expensive litigation or even criminal prosecution. At Ginsberg Law Offices, we’ll answer your questions at no charge, so that if you decide to file, your case will proceed smoothly and without drama. Call us today at 770-393-4985.