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While this reason should not be a “first choice” for you to declare bankruptcy, it will work. Student loans are no longer “dischargeable” unless you can prove “substantial hardship.” The code defines this as “the debtor cannot maintain a minimally adequate standard of living and repay the loan.” This standard is very difficult, if not impossible, to prove. But you still have two choices:
First, you could file a Chapter 7 liquidation petition. While you could not discharge your student loans, you might find that, by erasing most of your other debt , you would now have enough free cash to make your student loan payments as agreed.
Second, you could file a Chapter 13 action (wage earner plan) that will allow you to restructure all debt, including student loans. While you cannot be fully discharged from these obligations until paid, this bankruptcy action will, at the least, allow you to restructure your debt into manageable monthly payments.
Also, be aware that the recent bankruptcy reform act (2005) also mandates that, in addition to government-backed loans, private student loans are also now non-dischargeable.
Should you, or a family member, develop a serious medical condition, of which some or all the costs of treatment are not covered by health insurance, you may not have the ability to pay the resulting mammoth debt. Declaring bankruptcy may allow you to have these high balances erased to save your future financial stability.
For instance, you have health insurance coverage but your policy has a rather low “lifetime maximum” benefit. You develop a serious illness, say non-Hodgkin's lymphoma, which requires both immediate and longer-term treatment. After you finish your treatment, you're feeling better until you find out that you personally owe over $350,000, since your maximum benefit amount was not enough to pay for your care. With no way to pay this debt, you may consider filing bankruptcy as your best solution.
When you face repossession of your auto or other personal property on which creditors have a valid lien, filing bankruptcy will temporarily cease repossession activities. Should your property have already been repossessed, you could get it back, if you file immediately. Filing a Chapter 13 bankruptcy should allow you to keep your auto or property. A Chapter 7 filing will protect your property for a while but, depending on state statutes, you may be forced to turn it over to the trustee for liquidation.
Filing bankruptcy will temporarily cease any foreclosure activity on a home. If you file a Chapter 7 action, the protection will only last a short time depending on your equity position and the homestead provision of the state in which you file personal bankruptcy. Should you file a Chapter 13 petition, you will not only stop foreclosure but probably save your home. Since you will be making arrangements to pay a portion of your balances due on your unsecured debt and, probably, paying debts in full on secured loans, you should be able to keep your home.
There is no denying the fact that filing for bankruptcy is a big step, and one seemingly in the wrong direction. After all, you promised to repay your debtors, and the bankruptcy is a breach of that promise. Sometimes, it so happens that financial issues get out of control for various reasons, and bankruptcy is the only viable solution to regain control.
Bankruptcy is a legal "out" that is there for those who are in serious need of it. Many people come out of it wondering why they waited so long to file. Indeed, the stigma of becoming insolvent is very strong, preventing many from filing until long after the point of no return.
So, is there anything positive that can come from filing? Absolutely. Getting the petition filed with the local federal court starts what is known as the automatic stay. This stay prevents creditors from contacting you. In fact, you can contact the creditors with your bankruptcy file number and request that they honor the stay. Any violations of the stay have the potential to cost the creditor money in your favor, so be sure to document any creditors who violate the stay. What's best of all is the fact that the phone is now quiet, restoring your sanity.
Your credit rating drops immediately after filing, but even then, you can start building it up almost immediately after the discharge is entered. There are companies that offer credit cards post-bankruptcy, albeit with low limits, but they will report to the credit bureaus, increasing your credit rating as you charge and pay. Some feel that a Chapter 13 is less damaging to credit, as there is some repayment of the debt over a period of time. Just remember the lessons that were learned about handling money during the bankruptcy, and you'll be good going forward.
The best part of filing for bankruptcy is how much money it frees up. You find that all of the money you were once chasing down debt with is now available to you. Now you can fund your retirement, make investments, or simply save money for a rainy day.
Bankruptcy really is a fresh start, both in finances and life. It's as if you shed all of your burdens and stress to become a new and improved person. You'll wonder why you had so much trepidation to file to begin with.
Constant harassment from creditors and collection agencies can take a severe psychological toll on many people. Filing a petition in bankruptcy court creates an immediate “automatic stay”, which prohibits creditors from continuing current collection activity or initiating any new actions. One of the prime benefits of bankruptcy is the protection you will get from your creditors. Regardless of whether you choose Chapter 7 or Chapter 13, creditor calls and letters must cease right away.
You had an excellent job but your company was sold and you are now unemployed. Unemployment compensation is not enough to permit you to pay your debts as agreed. You also have a medical condition, say diabetes, that requires consistent treatment and medicine, neither of which you can now afford. You calculate your “new” budget and learn that if you could erase your current debts, you would have enough income to live and purchase your medicine and treatment. You realize that declaring bankruptcy is the best option for you in this situation.