March 18, 2020

If you’ve tried to clear your debts but are finding yourself in an endless hole of living paycheck-to-paycheck, without making a dent in the amount you owe, it may be time to file for bankruptcy. Bankruptcy can be the best option when it comes to giving you a fresh start, financially.

But filing comes with consequences affecting your credit score and ability to get loans.

In this post, we go over available options to help clear debt before filing for bankruptcy and the telltale signs on when you should file for bankruptcy.

What to Do Before You File for Bankruptcy

If you file for bankruptcy, whether it is Chapter 7 or Chapter 13, you must consider the consequences.

In a brief rundown, when you successfully file for either, you will have a public discharge on your credit. The discharge will remain on your record between seven and ten years, depending on which chapter you filed for.

It’s important that you explore other methods of repayment/clearing your debts before you file. Here are the top methods to consider before you resort to filing:

Negotiating with Creditors 

One of the first steps to take before filing is to have a discussion with creditors, to those entities/people you owe money to. If you’re relatively late with a payment, it may be in both your and the creditor’s best interest to come up with a settlement. Creditors are more likely to settle a debt than go to court and have that debt discharged in a bankruptcy filing.

In settling your debts, you negotiate with the creditor to accept a lump-sum payment to satisfy the debt you owe. This can clear you of that debt while avoiding a bankruptcy filing.

Typically, you can settle unsecured debt in one of two ways. You can either use a debt settlement company or do so on your own. But you should also be aware of tax implications when you pay less than what is owed.  

Credit Counseling 

Another option to avoid bankruptcy is to consider credit counseling. A consumer credit counselor can get a debtor lower monthly payments and interest rates if creditor negotiations are unsuccessful. Consumer credit counselors are representative of nonprofit agencies that work to find you reasonable solutions to financial issues. These counselors can help you create a good and workable budget to help you pay your debts on time on a month-to-month basis. When you find yourself looking for a credit counselor, be sure you’re wary of potential scammers.

Payment Through Savings and Assets 

If there are assets that you own that you are willing to sell off to pay creditors, then it may be an option to resell. When you file for bankruptcy, you’re required to list assets, (secured and unsecured) to determine if the value of those assets can pay off your debt. Similar to the value of assets, the amount in your savings account can contribute to paying off your owed debt as well. If you are finding yourself with little to no available savings to pay back your debt, then it may be time for you to get an attorney and file for bankruptcy. But keep in mind there are many assets protections in bankruptcy for which you do not need to sell.  

When You Know You Need to File 

Apart from having the value of your assets and available savings failing to make a dent in your debt, there are a number of signs that indicate it may be time to file either Chapter 7 or Chapter 13 bankruptcy.

Here are four circumstances that call for, at the very least, a consideration of bankruptcy filing.

Wage Garnishment 

Wage garnishment occurs when creditors or lenders file a suit, or have a court order, to take portions of your paycheck to pay off your debt. This garnishment usually takes a percentage of your company wage, dependent on the amount of disposable income on your paycheck. Filing for bankruptcy automatically stops garnishment and can even help recover lost wages. 

Paying With Credit Cards

If you find yourself in a cycle of more and more debt, with your only form of payment being credit cards, then bankruptcy can help break that cycle. When you continue to pay for necessities with credit cards, your debt continues to accrue, making financial stability seem impossible. That is a telltale sign that bankruptcy may be your best option. Chapter 7 bankruptcy usually clears you of credit card debt, giving you a financial fresh start. 

Using Retirement Account to Pay Bills

Retirement accounts are not meant to be touched until you retire. This means that when you do decide that your debts are too overwhelming to avoid dipping into your retirement funds, you’ll be penalized a percentage of those hard-earned savings. When you file for bankruptcy, pensions, life insurance policies, 401(k)s and IRAs are likely to be protected. In this case, filing can save you from needing to take out funds and receive additional penalties, while clearing you of your debt. 

Debt Exceeds Income

Similarly to when you assess the worth of your assets and savings, when your debt is more than what your regular income is, bankruptcy becomes the best choice to resolve your financial issues. When the amount of your disposable income (income that is not put towards living necessities) doesn’t cover your debt, it can cause you to fall even more into debt. 

If you’ve exhausted all the options to clear you of your debt such as credit counseling, debt consolidation, management or settlement, then it’s time to get a lawyer and discuss your options regarding bankruptcy filings. It’s important to remember that a minor discharge on your credit may be the best outcome if you feel as though you cannot escape the revolving wheel of impending debt. Get in touch with us today.

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