Is Bankruptcy Your Best Option?

Bankruptcy is an effective solution for those struggling with overwhelming debt. Still, it is a significant decision that should not be taken lightly. It will impact your credit and finances for the foreseeable future. Unfortunately, widespread misconceptions about bankruptcy keep qualified, honest, and deserving debtors from exploring their debt relief options and getting a fresh start. In this article, we will dispel some common myths about bankruptcy and discuss when it may be the right choice for you.

If bankruptcy is your most appropriate course of action, you should work with an attorney well-versed in Bankruptcy Law. Bankruptcy is a specialized area of law and is not for general practitioners. It is not a state law. It is a federal law and will require an appearance in Federal Bankruptcy Court. Thomas A. Corletta is here to help.

How to Tell If Bankruptcy Is Right for You


Monthly Bills Are Becoming Overwhelming

When your ordinary monthly bills, including consumer-related debt like credit cards, become too much and you can no longer pay on time each month, bankruptcy may be a consideration. With Chapter 7 bankruptcy, most unsecured debts will be discharged. This option best suits people with low to middle-income and minimal assets, such as a house with a mortgage and a car with a lien. Medical, utility, credit card bills, and unsecured personal loans are common debts that can be discharged in Chapter 7. However, collateralized loans, such as mortgages and car payments, cannot be discharged without losing the collateral, i.e., the house or car.

With Chapter 13 bankruptcy, debts can be restructured into a long-term repayment plan of between 3 & 5 years, usually without losing property. This option is designed for people with disposable income above living expenses at the end of the month to put towards repayment, usually on a percentage basis. Proposed plans must be feasible and in the best interests of the creditors. Most types of debt can be included in the Plan, which you repay over three to five years with interest. Secured debts are treated differently from unsecured debts and are repaid in full. You must have regular income to pursue Chapter 13.

You Can Only Make Minimum Payments

Making minimum payments on a credit card only covers part of the interest and does not make a sizable dent in the underlying debt. Only making minimum payments costs you more because of high-interest rates, which continue to compound on unpaid balances. If you can only afford the minimum, bankruptcy may be a logical choice. Borrowing money from other sources to pay these debts, such as “consolidation loans,” is unwise because there will be a temptation to run up the credit cards again. Nor should you borrow from your retirement or take a second mortgage on your home to pay credit card debt because that is simply transferring dischargeable debt to an asset exempt in Bankruptcy, i.e. the equity in the house or your retirement. In Bankruptcy, the equity in your home and your retirement is usually exempt from the claims of creditors.

Wages Are Being Garnished

A lender can pursue legal action for unpaid debts in Court. They can get a judgment against you and garnish your wages by Court Order. Your bank account or other property can also be seized. If you are experiencing adverse creditor action like this, filing for bankruptcy is probably necessary. Bankruptcy, through the “automatic stay”, stops all adverse creditor action like wage garnishments and property seizures upon filing, and notice to creditors.

What You Need To Know About Filing For Bankruptcy


Bankruptcy Does Not Permanently “Ruin” Your Credit

After filing for bankruptcy, your credit score will probably drop. Bankruptcy is a public record that is reported on credit reports. While this may seem drastic, the long-term effects are less severe than a history of late payments, accounts going into default, lawsuits, repossessions, foreclosures, etc. Filing for bankruptcy stops past creditor actions and gives you a fresh start. Creditors may no longer proceed against you. You can rebuild your credit through auto loans and secured credit cards. You may pay higher interest rates, but you will be free of debt and able to reestablish credit with timely payments. In these limited circumstances, you are considered a reasonable risk by lenders because you are free of debt and cannot file Bankruptcy again for eight years.

You Will Not Lose All Your Belongings

In exchange for liquidating unsecured debts in a Chapter 7 bankruptcy, the Trustee can seize assets, but only if you have assets not covered by exemptions. However, bankruptcy law allows you to exempt a wide range of property, including home equity, equity in a vehicle, some cash and tax refunds, retirement accounts, and household possessions. In actuality, most debtors get the debt relief they need without losing anything.

People Who File For Bankruptcy Do Not Go To Jail

Lenders often spread the lie that bankruptcy fraud is widespread, and many people who file wind up going to jail. This is nonsense and put out there by creditors who know that once someone files for Bankruptcy, they must comply with the law and probably will not be able to collect anything. Nearly a million people in the US file for bankruptcy every year. The vast majority are honest, hard-working people who have undergone some hardship, such as illness, job loss, divorce, or poor money management. The Bankruptcy Code exists to help people who have fallen on hard times get a fresh start and to educate them on personal finance through a required post-filing course.

Bankruptcy Does Not Eliminate the Entirety of Debt

Some misconceptions overstate the benefits of filing for bankruptcy. While a Chapter 7 Bankruptcy will eliminate credit cards, unsecured personal loans, and other unsecured debts, some obligations are non-dischargeable. Student loans, unpaid child support, unpaid alimony, and many types of taxes usually cannot be discharged in a Chapter 7 Bankruptcy. Secured loans must also be repaid, or the collateral, such as a home or car, is surrendered. When you repay a secured loan after filing for Bankruptcy, it is called Reaffirmation, and you must sign an Agreement stating that you will repay in exchange for retaining the collateral. If you do so, your Bankruptcy Discharge does not apply to that debt, and if you fail to pay, the creditor can take action against you, just as if you never filed for Bankruptcy. Reaffirmation should be carefully considered with your attorney.


Fighting For Your Financial Future

Don’t let myths and misconceptions prevent you from exploring debt relief options. If you are experiencing any of the scenarios mentioned above, talk to an experienced bankruptcy lawyer to understand your options and determine if bankruptcy is the right choice. With over 40 years of legal experience, Thomas A. Corletta, Attorney at Law, represents clients throughout the Rochester and Western NY area and can help you choose the best option for your particular financial situation.