Items to Consider Before Filing for Bankruptcy
The decision to file for bankruptcy should never be taken lightly, and it is important to consider all of the consequences that a bankruptcy can bring about—both positive and negative—before deciding to file the bankruptcy petition.
Items to consider before filing for bankruptcy include the type of debt involved, as well as the end result sought by the debtor. Debt discharge is not the only consequence of a bankruptcy filing. For more information, contact an experienced bankruptcy attorney.
Secured vs. Unsecured Debt
Several items to consider before filing for bankruptcy involve consideration of the type of debt at issue. Unsecured debts are not secured by any specific asset, while a secured debt is one that is secured by a specific asset—in many cases, the asset that the debt was used to purchase. A mortgage or a car loan are examples of secured debts.
If the debtor’s debts are primarily unsecured debts, filing for bankruptcy may provide a viable solution to the individual’s financial problems. These debts will usually be discharged at the conclusion of the bankruptcy proceeding, providing the fresh start that the debtor was likely expecting.
On the other hand, if the individual has significant secured debts, bankruptcy may not be the most attractive option. While filing the bankruptcy petition will freeze the secured lender’s collection efforts, including any foreclosure or repossession actions, this relief is only temporary. After the bankruptcy proceedings have concluded and the automatic stay is lifted, the secured lender’s right to repossess the debtor’s asset remains intact.
If the debtor’s goal is to avoid foreclosure on a home, for example, filing for bankruptcy may not be the best way to accomplish this goal. In these cases, a mortgage modification or refinancing may better provide a better result.
Chapter 7 vs. Chapter 13 Bankruptcy
A Chapter 7 bankruptcy case will result in most unsecured debts being completely discharged, while a Chapter 13 case requires establishing a repayment plan that will satisfy creditors to the extent possible. Debtors with significant secured debt may find Chapter 13 attractive because it establishes a plan to reaffirm debts with the secured lenders so that debtors may be able to keep their assets.
However, Chapter 13 also requires that the debtor have sufficient income in order to realistically satisfy the requirements of the repayment plan. The repayment plan must be approved by the court and is administered by the bankruptcy trustee, so that Chapter 13 may not always be a viable option.
Get an Attorney’s Advice Before Proceeding
An experienced bankruptcy attorney can outline the relevant items to consider before filing for bankruptcy and can also provide advice as to whether a Chapter 7 or Chapter 13 bankruptcy is advisable under the circumstances. It is important that any debtor considering bankruptcy obtain individualized advice, as every case is different and a knowledgeable bankruptcy attorney’s advice can make all the difference in securing a favorable outcome.