Bankruptcy v. Doing Nothing

Should you file for bankruptcy to get rid of debts, or can you sit back and wait?

If you’re struggling with debt, filing for bankruptcy can be a good way to get your finances back on track. But not everyone needs to start a bankruptcy case right away. Whether you should file for bankruptcy or do nothing will depend on whether you’re vulnerable to creditors. In some cases, doing nothing (at least for now) might be the best option.

Do You Have Anything Creditors Can Take?

Most creditors need to file and win a money judgment in court before they can take your property. If, however, you don’t have anything that a judgment creditor can collect, you’re “judgment proof.” You won’t need to file for bankruptcy.

In general, you are immune to prejudice if:

• You have no equity in actual property.
• There are no assets that you cannot shield from creditors. (State exemption regulations prohibit you from surrendering certain types of property to a creditor or in bankruptcy, including equity in a home or vehicle, food, and basic necessities of life.)
• You are unemployed or have a low-paying job.
• You obtain a source of income that is exempt from creditors, such as Social Security (and, in some states, unemployment other public entitlement benefits).

However, judgment immunity can be a transient condition. For example, being now unemployed but employable in the future is not equivalent to being permanently retired.

If you are reasonably certain that your financial condition will not significantly improve and collection pressure does not disturb you, there may be no cause to file for bankruptcy.

Will Bankruptcy Wipe Out Your Debt?

Not all debts get discharged in bankruptcy. If you will still be required to pay your most troublesome payments after filing for bankruptcy, you should probably avoid doing so. On the other hand, if filing for bankruptcy eliminates enough debt to free up additional funds for nondischargeable debt, it may still be beneficial.

The debts listed below are either difficult or impossible to discharge in bankruptcy. In addition, creditors with these sorts of debt can use wage garnishments and bank levies even without a court ruling.

The filing of Chapter 7 bankruptcy will neither eliminate or lower child support obligations. Therefore, filing for Chapter 7 bankruptcy will not help unless you can free up future income to pay child support through the discharge of other debt.

Chapter 13 bankruptcy, on the other hand, may be preferable. By engaging into a three- to five-year repayment plan to pay off your arrears in full, you can end collection actions. Be warned that if you have a substantial outstanding balance, your monthly payment can be high because you must pay off all of the arrearages in the plan. You’ll still have to continue making your ongoing child support payment, as well.

If you can catch up in Chapter 13 bankruptcy, you will avoid the following complications:

• Income garnishment
• loss of unemployment compensation
• jail time
• offsets of federal or state income tax refunds
• passport denial
• Compensations for state lottery wins
• driver’s license suspension
• diminution of workers’ comp benefits or
• Social security or disability benefits are reduced.
• Past Due Income Taxes
• Taxpayers with delinquent tax obligations are susceptible to a levy on their assets or other sources of income. A levy is a legal seizure of your property to satisfy a debt. Once a levy is in place, it normally remains until you pay off your tax burden.
• If you owe past-due income taxes and you do nothing, you could face the following:
• Losing federal or state tax refunds
• a reduction in social security benefits
• a wage garnishment (depending on the state in which you live), or
• a lien against your real estate.
• Understand that filing for bankruptcy will not reduce recent tax obligations. However, in a Chapter 13 case, you could be able to pay down the tax burden over a period of three to five years.
• Student Loans
• If you default on your student loans, the lender may take the following actions:
• Income garnishment (depending on the state in which you live)
• Federal and state income tax refunds are offset.
• loss of eligibility for government help, including Pell awards
• Loss of deferral and forbearance alternatives, or
• a decrease in Social Security benefits.
• Student loan debt is difficult to discharge in bankruptcy. You must prove that paying your loans will impose an undue hardship, which is a challenging threshold to fulfill, although not impossible in every scenario.

Are You in Danger of Losing Your Home or Automobile?

If filing for bankruptcy can save your home or vehicle, it may be a viable option for you.

Chapter 13 bankruptcy allows you to catch up on mortgage or auto loan payments if you’ve fallen behind. You may also be able to eliminate second mortgages or home equity lines of credit and decrease your auto loan to the car’s current market value. (See Your Car in Chapter 13 Bankruptcy and Your Home and Mortgage in Chapter 13 Bankruptcy.)

In Chapter 7 bankruptcy, you cannot bring a loan payment current, but it may be useful to file if you can eliminate other obligations to free up funds to pay your mortgage or auto loan. Keep in mind that in order to keep a property or vehicle under this chapter, you must be current on your payments at the time of filing. (See Chapter 7 Bankruptcy and Your Home and Chapter 7 Bankruptcy and Your Car.)

Alternatives to Insolvency and Inaction

Before deciding to file for bankruptcy or do nothing, you should read Alternatives to Bankruptcy to learn about other debt relief choices.