Bankruptcy and Specific Situations

Filing for bankruptcy can be really confusing and complicated. There’s a lot to think about and consider when your finances get to that point. This article will walk through some of the basics of bankruptcy and how it might apply in certain situations, to hopefully make things a little easier to understand.

The Bankruptcy Process

First, it’s important to understand the overall bankruptcy process. There are a few key steps:

• You file a bankruptcy petition in court, either voluntarily or your creditors force you into it.
• The court appoints a trustee to oversee your case.
• You have to provide details about your assets, debts, income and expenses.
• The trustee can liquidate some of your assets to pay creditors.
• The court decides which debts can be eliminated or adjusted through the bankruptcy.
• You get a fresh start financially after the process is done.

There are a few different “chapters” you can file under, but the main ones are Chapter 7 and Chapter 13 for consumers:

• Chapter 7 – Total liquidation of assets. Wipes out most unsecured debt like credit cards.
• Chapter 13 – You repay a portion of debts over 3-5 years. Keeps assets.

The specifics vary, but that’s the gist of how bankruptcy works. Now let’s look at some scenarios where bankruptcy comes into play.

Medical Debt

Medical debt is a huge reason many folks end up considering bankruptcy. Bills from an unexpected surgery, hospital stay, or ongoing treatment can pile up fast. This is where bankruptcy can provide a fresh start. Your medical debts would likely be discharged entirely in Chapter 7 or mostly paid off through the Chapter 13 repayment plan.
Some things to think about with medical bankruptcy:

• Make sure to include all medical creditors when filing.
• The court may require you to prove the debts are truly medical.
• Medical debts less than 90 days old may not be discharged.
• Your home, car, retirement funds are usually protected.

So bankruptcy can be a lifesaver if you have crushing medical bills. Consult a lawyer to discuss the timing and your specific situation. [1]

Credit Card Debt

It’s very common for high credit card balances to be a factor in bankruptcy. The average filer has around $15,000 in credit card debt they’re looking to eliminate. [2] With credit card debt, Chapter 7 bankruptcy is probably the best option since it liquidates your assets to pay back only secured debt like mortgages. The remaining credit card balances are generally wiped out completely.
Some things to keep in mind if credit cards are your main concern:

• Debt less than 90 days old may survive bankruptcy.
• Luxury purchases right before filing can be contested.
• You’ll have to go through credit counseling.
• Interest and fees build up until debts are discharged.

While bankruptcy should provide relief from burdensome card debt, it’s not a free pass for irresponsible spending. Use it as a fresh start to make changes. [3]

Foreclosure

Losing your home to foreclosure is devastating. Bankruptcy may help you keep it. Filing Chapter 13 bankruptcy stops any foreclosure proceedings. The repayment plan can get you caught up on missed mortgage payments.
Some tips for bankruptcy to avoid foreclosure:

• You must have regular income for Chapter 13.
• The mortgage lender has to approve the repayment plan.
• You still have to make ongoing payments.
• It’s not a permanent solution – stay on top of finances.

Bankruptcy gives you time and breathing room to work things out with the mortgage company. But you’ll need to budget carefully going forward. [4]

Student Loans

Student loans are notoriously difficult to discharge in bankruptcy. You have to prove repaying them would cause “undue hardship.” Some things that help your case:

• Total disability and inability to work.
• No assets and very low income.
• High debt from predatory school.
• Made good faith effort to repay loans.

Even then, the court may only discharge part of the debt. Or they’ll put your loans on hold while you sort out your finances. So getting rid of student loans through bankruptcy takes some very extenuating circumstances. But it is possible in some cases.
5

Small Business Bankruptcy

If your small business struggles with debt, bankruptcy may help you reorganize and get back on track. With Chapter 11 bankruptcy, you can:

• Pause debt collection and lawsuits.
• Restructure finances and debts.
• Become profitable again.
• Emerge without having to liquidate.

It gives you time to right the ship. Some tips:

• Get experienced legal help.
• Be upfront with employees and vendors.
• Have a post-bankruptcy business plan.
• Focus on high margin products/services.

Chapter 11 can work wonders for a struggling company. But you need a strategy for success on the other side. [6]

The Bottom Line

There are always pros and cons with bankruptcy. It can provide a fresh start when you’re buried in debt. But it also has long-term consequences for your credit and finances. Think carefully about your specific situation if considering bankruptcy. And always consult an experienced bankruptcy attorney to understand your options.
While it seems scary, bankruptcy can be the light at the end of the tunnel if debt has become overwhelming. Have hope! With careful planning, you can get back on track.

References:

[1] How to File Medical Bankruptcy
2
Credit Card Debt Statistics
3
Wipe Out Credit Card Debt With Bankruptcy
4
Can I Use Chapter 13 Bankruptcy to Stop a Foreclosure?
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The Truth About Student Loans and Bankruptcy Discharge
6
6 Advantages of Small Business Chapter 11 Bankruptcy