Although most people want to avoid bankruptcy, it may be the best option in some situations. Bankruptcy is a process under federal law where debtors get much needed relief from creditors’ collection actions. One of the greatest advantages of filing for bankruptcy protection is that the filing stops all collection actions immediately and automatically: foreclosures, wage-garnishments, lawsuits, repossessions, etc.
However, one should not rush to file without considering the timing of the filing because it could make a difference in the results obtained. For example, filing too soon may leave the debtor responsible for some debts. Also, if the debtor’s financial situation is changing or will change in the future because of a change in household size or income, the precise timing of the filing could make the difference between qualifying for bankruptcy or not. Also, if the home is in foreclosure, the timing of the bankruptcy is crucial. Filing too late may leave the debtor with tax liability due to the foreclosure sale. Also, if there is real estate involved that is losing value, the timing of the bankruptcy can determine whether the mortgage balance and terms can be modified or not.
Besides determining if bankruptcy is the right option and when to file, the next step is to determine the type of bankruptcy that should be filed in the particular case. This will depend on a number of factors, including whether the debtor has any disposable income to pay some of the debt, whether there are non-dischargeable debts (such as taxes, child support) and also if the debtor has non-exempt assets.
In most cases, debtors are able to keep all their assets and can get rid of most of the debt in a Chapter 7 Bankruptcy. However, in some cases the debtor may need to file a Chapter 13 “reorganization” bankruptcy if they can make some payments over a period of time for the benefit of creditors. The amount will depend, among other factors, on the debtor’s disposable income. A Chapter 13 will also allow homeowners time to cure the arrears if they have fallen behind on mortgage payments. Income taxes can also be paid in a Chapter 13 plan over a period of time, without penalties or interest accruing.
The single greatest advantage of bankruptcy is the “discharge” that permanently wipes out the individual’s legal obligation to pay most of the debt and allows individuals a “fresh start.”
For a free initial consultation regarding consolidation of debt, payment reduction, bankruptcy (personal and/or business) and other related matters, please contact Susana B. Tolchard at 661-287-9986.
