Are you thinking about filing for bankruptcy? Take a look at the 8 most common reasons to file for bankruptcy and contact your attorney for help.

Filling for bankruptcy may be a viable option for you if you’re faced with financial troubles.

With that said, bankruptcy does come at a cost so you need to understand the pros and cons of making such a move. A bankruptcy attorney will be able to advise you on whether or not it’s a smart move for your situation.

Today, we’re taking a closer look at the most common reasons to file for bankruptcy so you can make an informed decision whether or not you need to take the next step. The next step, of course, is contacting a lawyer for help so you can work through the process efficiently.

Let’s get started.

The 8 most common reasons to file for bankruptcy

Bankruptcy traditionally has had a negative connotation, with people in financial trouble hesitant to consider it because they see it as a blemish on their reputation, a reflection on their character. But it can be a game changer financially and can be a way to start fresh, and ironically, can reflect a smart financial decision.

There are many good reasons to file for bankruptcy. And there are a few bad reasons. There are good times to do it and bad times. It’s a process that calls for professional advice and counseling, and it would be wise to involve a qualified bankruptcy lawyer.

First, let’s take a look at the 8 most common reasons to file for bankruptcy.

Medical Debt

According to a Harvard study, 62 percent of those filing for bankruptcy said that medical debt due to a catastrophic illness was the reason they filed. Many of these people had insurance, but the deductible was very high or the insurance didn’t cover the type of medical condition that arose unexpectedly. They simply got a lot of medical bills they couldn’t pay.

Loss of Job

How many times does it happen that someone goes out and buys a house or a car, and then loses his job without warning? Maybe his kids just started college. Maybe there is a wedding in the air. A loss of income can be devastating.

In addition to losing income, the person loses medical coverage and maybe has to look for another job somewhere else with relocation and retraining expenses. Creditors are not sympathetic to these unexpected obstacles to making payments.

Divorce

There can be financial problems during a marriage. There are usually some financial bumps along the way. But these are nothing like the enormous problems divorce can create.

If there were difficulties in paying the bills with two incomes, it will be more difficult with one. Keeping the same lifestyle will be questionable, and changes would almost certainly have to be made.

Ongoing debts would have to be addressed from a new perspective including mortgage payments, private school or college tuition, loans and credit cards. In addition, filing for divorce can lead to more bills for alimony, child support, and court expenses.

Bank Foreclosure

If your bank is about to foreclose on your home, you can use bankruptcy to stop the foreclosure through the automatic stay that comes with bankruptcy. This prohibits lenders and creditors from continuing collection actions against you. Chapter 13 is the bankruptcy process that lets you catch up on mortgage payments. Other forms of bankruptcy do not give you this privilege. That’s why a bankruptcy attorney is an important consultant. He can guide you in the right direction.

Car Repossession

If you are about to lose your car to repossession, you can stop the process through bankruptcy. You are granted a temporary stay which may give you time to catch up on payments (Chapter 7) or make back payments part of your recovery plan (Chapter 13).

Moving to a New State

You don’t have to relinquish all of your property as part of the bankruptcy process. States have different exemption laws that protect property. Some laws are more favorable than others. Each state has a list of exemptions that can possibly help you retain all or most of your property.

If you have just moved to a new state and the exemptions are different and not as favorable as your old state, an attorney can advise you of how to use the exemptions strategically. Sometimes you can use the exemptions that are more beneficial.

Being Evicted

If you are being evicted by your landlord (but it hasn’t happened yet), you can use bankruptcy to temporarily stop it and buy time. You will still have to pay the rent at some point. There are some exceptions to this. If your landlord already has an eviction order, then bankruptcy can’t stop it. If you are being evicted for drugs, criminal activity, or other illegal activities, then bankruptcy can’t help here either.

Being Sued

You can be sued for a variety of reasons including credit card debt, medical debt, vehicle accidents, breach of contract, patent or copyright infringement or many more legal infractions. Bankruptcy can stop them and may even get the charges dismissed. Not all court actions can be stopped by bankruptcy. An attorney will know what can and cannot be pursued.

Aside from the more common reasons to file for bankruptcy, there are a few bad reasons to avoid.

Bad Reasons to File

If you are behind in payments for small unsecured loans like credit cards or medical bills, the lender doesn’t have anything to repossess. Most of these lenders would have to go to court and sue you in order to garnish your wages or take other significant action against you.

Sometimes, if the debt is small, the lender will just write off the debt as uncollectable. The lender might accept a sum payment for part of what is owed. Or the lender will be open to negotiation on terms or interest.

It is not necessary to file for bankruptcy in these situations. Your lender will work with you because they know if you do file, they will get little or nothing in return.

There is another bad reason to file, and that is to just stop collections agencies from calling you. There is a better way to do this. You can just send a certified letter requesting the collections company stop calling you. The collections agent is bound by the Fair Debt Collections Practices Act (FDCPA) which prevents them from calling after you contact them.

In an ironic twist, you can sue the collector if that company violates the FDCPA. You should keep good records like calls, voicemails, and emails that prove you were contacted after you asked them to stop.

Stopping the collections agency from harassing you does not affect your relationship with your lender, however. You still need to repay the debt.

There are certain kinds of debts that cannot be discharged through bankruptcy so it would not be a good idea to file in this case. Examples of these debts would be income taxes, court judgments, child support and student loans.

And there is no need to file in order to protect your unemployment income, Social Security, welfare or government-guaranteed student loans. Creditors cannot take these from you.

There is a lot to know about filing for bankruptcy. If you have a good reason to file, then you also have a good reason to hire an attorney.

 

If filing for bankruptcy is your best option, there are a few things you should know. Join us and learn how to protect yourself during bankruptcy today.

Filing for bankruptcy may be a legal option, but it’s still important you protect yourself during bankruptcy.

If you are struggling financially, filing for bankruptcy may be the best option for you to explore. It is not something you normally consider but when you face the reality of financial ruin, you do need to look at it and do some planning for it. Bankruptcy provides an option to help you out in a number of different areas.

Bankruptcy can wipe out credit card debt as well as other unsecured debts. It can stop creditor collection activities and harassment. It can get rid of some kinds of liens. It can prevent a creditor from repossessing your property. And it can eliminate obligations for alimony and child support in some cases.

But bankruptcy does not eliminate all debts. For example, it will not help with overdue taxes or student loans. However, the financial plan created as part of the bankruptcy process can help with these issues.

Retirement accounts are normally excluded from the bankruptcy process unless you are withdrawing funds from your retirement accounts to pay bills.

How to protect yourself during bankruptcy

Part of protecting yourself before filing is understanding what will be covered and not covered by bankruptcy. You need to be informed before taking this big step.

Going through the bankruptcy process can be very stressful and somewhat confusing. There are several different forms of bankruptcy including Chapter 7, Chapter 11, Chapter 13. A good bankruptcy lawyer can help you decide which one is best for you.

A bankruptcy attorney can also help you with the process and with suggestions on what actions you should take before, during and after filing for bankruptcy. The filing process itself is one strategy, but there are others you should also consider.

Open a new bank account

The first thing to do is create a new bank account. One of the advantages of bankruptcy filing is getting an automatic stay against collections. However, some creditors like banks, savings and loans, and credit unions are still legally allowed to take setoffs against funds you owe them.

If you are behind in credit card payments to a bank or credit union, and you file for Chapter 7, for example, these creditors can still withdraw money from a deposit account like your checking or savings account, certificate of deposit or money market account.

To protect yourself during bankruptcy, go to a different financial institution where you have no debt and open a new account. Use this account for direct deposit and transfer any other funds you have to this account.

Be aware of limits on setoffs

There are some limitations on bank and credit union setoffs. Most courts say that banks cannot use setoffs on income that is considered exempt under federal or state law, such as unemployment compensation, disability benefits, public assistance or Social Security benefits.

Banks and credit unions cannot take money out of your account to pay for missed consumer credit card payments – unless you have authorized the bank to make automatic withdrawals.

There are also various state limits on setoffs. In California, state-chartered savings and loan setoffs are prohibited if the balance of all your accounts with your bank is under $1,000.

Stop auto withdrawals

Opening a new account is a good idea. You should stop auto withdrawals from your previous bank for unsecured debts like credit card payments as soon as you file. You should use the new account for auto withdrawal on maintenance debts like utilities, car or cell phone.

You should stop auto withdrawals from your previous bank for unsecured debts like credit card payments as soon as you file. You should use the new account for auto withdrawal on maintenance debts like utilities, car or cell phone.

This simple step will help you avoid penalties and fees associated with failed transactions, which could help protect you during bankruptcy.

Have cash on hand for utilities

When you file for Chapter 7 and you are behind in your utility payments, your provider cannot go after you to collect what you owe. However, if you made a deposit, your provider can use that as partial payment on that debt. This can still leave you behind as you move forward with the new month’s bill, and the provider can ask for a new deposit. You should bring all your utility bills current before filing or have cash on hand to pay for them going forward.

Cut up your credit cards

Bankruptcy is a process to help you survive the large debt you have already amassed. It is not a way to build up a lot of debt quickly and then try to have it wiped out through filing. Credit card companies would question this activity and in fact, suspect that it might be fraudulent.

If it were found that you were planning on filing for bankruptcy and maxed out your credit cards in the preceding weeks or even months, you could be charged with fraud and most likely not have that debt discharged during bankruptcy. It could also lead to the dismissal of the discharge of all debt for the entire bankruptcy.

Create a workable budget

The bankruptcy won’t work if you cannot afford to maintain the new plan for repayment of debt. In Chapter 13, the plan will be based on the debts you need to repay and your ability to make the payments. The latter is determined by your disposable income.

The disposable income is the amount you will pay into your Chapter 13 plan every month. It is calculated by taking your monthly take-home pay and deducting personal and household expenses.

Some of that disposable income might be used in discretionary spending like cable TV. If you need more disposable income to pay into your Chapter 13 plan, you can cut back on some of this discretionary spending.

In any event, the budget you come up with must be a realistic one that you can maintain for the next few years to make your Chapter 13 plan work.

Follow the rules of bankruptcy filing

There is a set of rules to follow when filing for bankruptcy. Here is where an attorney can be most helpful. The process involves appearing with an attorney to answer questions by the bankruptcy trustee. There is also a Notice of Commencement of Case from the Court that sets the date and time of the first meeting with creditors where they get to ask you questions.

There are many things that can happen during bankruptcy proceedings. Creditor claims may differ from what you disclosed. This could affect the payments you need to make. Creditors can object to your claims. A trustee may dismiss your case entirely because you did not file all required paperwork or were late doing so.

After your bankruptcy plan is established, the case is not over.  There is a variety of communications that occur during the three-to-five-year period that follows. Read and if necessary respond to mail you receive from your attorney, the trustee, or creditors and their attorneys. Review all creditor proofs of claims and let your attorney know if you disagree with any of them.

BY keeping in constant communications with your bankruptcy attorney, you will have the guidance you need to observe all requirements so you can protect yourself during bankruptcy. This step will also help you plan the personal budget and lifestyle changes that will put you back on the road to financial viability and success.

 

If you’re struggling to pay your debts, you may be considering the advantages of filing bankruptcy.

So, what does it mean to declare bankruptcy anyway?

Bankruptcy is a legal proceeding involving an individual or business that is unable to repay outstanding debts. Bankruptcy offers an individual or business a chance to start over by having debts forgiven – those debts that just can’t be paid.

Bankruptcy helps creditors by giving them some repayment of what is owed them, based on the business assets of the individual or business – those assets that can be evaluated and liquidated.

So bankruptcy helps both debtor and creditor.

Let’s take a closer look …

What does it mean to declare bankruptcy?

It gives debtors a second chance at consumer credit, and it gives creditors some repayment of the debt. On successful completion of the bankruptcy process, the debtor is relieved of the debt obligations that were filed.

In most cases, the debtor begins a bankruptcy proceeding with an attorney by filing a petition on behalf of himself. In some cases, the debtor files on behalf of all debtors.  In either case, all of the debtor’s assets are evaluated, and these assets may be used to repay all or a portion of the outstanding debt.

“Bankruptcy” is a term for the federal court procedure that helps individual consumers and business people, as well as business organizations, get out of debt while paying creditors what they can. Bankruptcies can be categorized into two general types: “liquidations” and “reorganizations.”

In the United States, there are several kinds of bankruptcy filings, each classified by a code. Chapter 7 is the code dealing with the liquidation of assets. Chapter 11 covers individual or company reorganizations. Chapter 13 deals with debt repayment with lowered debt agreements or some kind of payment plans. Chapter 12 is similar to Chapter 13 except it applies only to those who have at least 80% of their debts due to a family farm.

Rules for filing bankruptcies and associated fees differ from state to state, depending on complexity.

Here’s a look at three of the most common types of bankruptcies …

Chapter 7 bankruptcy

Chapter 7 is for individuals with no or few assets. Their current debts may be secured (those guaranteed by collateral) or unsecured. Unsecured debts could include medical bills or credit cards, and these are the debts that are forgiven.

Assets can be exempt or non-exempt. Those that are exempt, like household furniture, tools needed for a trade, clothes, and personal vehicle up to a limit – are not subject to being liquidated and do not have to be used for repayment of debt.

Non-exempt assets do have to be liquidated for all or partial repayment of debt. These can include cash, stocks, bonds, second car or second home, jewelry, coin and stamp collections, etc.

In a Chapter 7 proceeding, the debtor must decide whether to keep making payments to creditors, pay creditors an amount equal to what is owed, or allow creditors to repossess the assets to secure the loans.

While many exempt assets can be forgiven, there may be some that will remain after Chapter 7. These would include items like taxes owed, alimony and child support.

A Chapter 7 proceeding usually takes three to six months.

Most Chapter 7 cases have been discharged successfully, and the individual was no longer required to pay the debt. In 2016, the National Bankruptcy Institute (NBI) found that this was true in 95% of the cases studied.

Chapter 11 bankruptcy

Usually, it’s businesses, not individuals that file for Chapter 11 bankruptcy, although it is possible for individuals to do so. Chapter 11 enables businesses to reorganize, perhaps change product or pricing plans, or modify operational procedures, in order to get their affairs in order and pay off their debts.

A business might increase its product line or services or increase its rates to improve revenues and thus allow it to better pay its creditors. The company continues its operations uninterrupted while working on a plan to repay its creditors – with the court’s oversee.

An individual can apply for Chapter 11 if he or she owns a lot of non-exempt property like several homes or apartment buildings. But the process here is more expensive than Chapter 13.

Chapter 13 bankruptcy

As mentioned above, Chapter 7 is designed for people with little or no assets. For those with a living wage who do have cash assets and possibly other assets, Chapter 13 may be the way to go. An attorney can tell you which code is best for you – Chapter 7 or Chapter 13.

Chapter 13 enables individuals and businesses to establish repayment plans, acceptable to creditors, and the court allows the debtor to keep all properties including non-exempt.

Only people with an established income are eligible to file for Chapter 13.

Chapter 13 courts work with debtors to establish a repayment plan and require the debtors to maintain the plan over a three-to-five year period. The amount to be repaid depends on several factors including existing income, how much debt is owed, and how much creditors would have received as a result of your filing under Chapter 7 instead of Chapter 13.

There are limits on filing for Chapter 13, and the debtor must show that he or she is under those limits when filing. In 2009, the limit on unsecured debt was $336,900. The limit on secured debt was $1,010,650. If a debtor has more debt than either of these limits, he cannot apply for Chapter 13 bankruptcy protection.

Chapter 13 does allow the repaying of secured debts, even if the debtor is behind on the payments. In such instances, past due payments are included in the new repayment plan. The court will not require repossession of the property that secures the debt. The repayment is usually done over a period of years.

Consequences of filing for bankruptcy

Filing for bankruptcy has its advantages as noted above.

The debt is discharged where permitted. And there is an “automatic stay” put in place that prevents creditors from any further action on collecting the debt including sending you letters, calling you, or similar actions.

However, there are negative consequences as well. For example, if a bank has a lien on your home, the lien will remain after bankruptcy. You will still be subject to foreclosure if you default on that loan.

You may be able to make an agreement with your lender to take your loan out of bankruptcy through a process called reaffirmation. But you would still have to continue making payments.

Another negative consequence is the loss of privacy. Any personal financial information filed becomes accessible by the public. This factor alone sometimes dissuades debtors from filing for bankruptcy and has to be weighed against the benefits.

A credit score is affected by filing for bankruptcy, and the effect can be both negative and positive. It’s negative in the short-term, and credit scores take a real dive. But bankruptcy provides a way to meet financial obligations in a responsible way going forward, perhaps more so than before filing. In the long run, credit scores can be rebuilt to levels higher than before filing.

If you are considering bankruptcy at all, it is wise to consult a bankruptcy attorney who can advise you on the current asset rules and restrictions as well as state regulations in your area.