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Rule # 5: Know Whether and When to File Bankruptcy

How Bankruptcy Can Help. Federal law provides you the right to file bankruptcy and this is a powerful tool to deal with your financial issues. Bankruptcy at least temporarily stops foreclosures, repossessions, utility terminations, garnishments, and other collection actions against you. Bankruptcy can restore your utility service. It allows you to keep your home or car by getting caught up on back-due payments slowly over time. For car loans you may even be able to lower your monthly payments. To keep your home and car, you still have to keep up with new mortgage and car payments as they come due.

Bankruptcy is effective at dealing with court judgments, stopping wage garnishment, bank seizures, and enforcement of judgment liens. It protects household goods collateral. If bankruptcy discharges a debt whose non-payment led to suspension of your driver’s license, you get your license back.

Bankruptcy gets rid of medical, credit card, and many other debts, but it cannot eliminate child support, alimony, most student loans, court restitution orders, criminal fines, some taxes, and debts you incur after you file for bankruptcy.

Bankruptcy Costs. It is best to hire an attorney to help you file bankruptcy. Sometimes you can find a legal services or other attorney who will not charge you. The bankruptcy court charges a filing fee of more than $300, but you can spread this fee out over several months and in some cases it can be waived.

Common Misconceptions. Despite what you might think, typically you lose little or no property in bankruptcy. Bankruptcy may not hurt and may even help your standing with creditors. Your reputation in the community is unlikely to suffer. Housing authorities, licensing departments, and other government agencies cannot discriminate against you for having filed for bankruptcy.

When to File Bankruptcy. Bankruptcy is not really a “last resort” for those in financial trouble. Legal rights can be lost by delaying a bankruptcy. Get early advice about bankruptcy if you are concerned about saving your home or your car or protecting your bank account or wages from seizure.

On the other hand, if you do not face immediate property loss and instead will incur new unaffordable debts in the future, delay bankruptcy until you incur those new debts. Debts incurred after you file bankruptcy are not discharged in that bankruptcy case—you are obligated to repay those new debts in full.

For More on Bankruptcy. More on whether and when to file bankruptcy is found in Chapter 24. Chapter 25 summarizes the steps involved in filing either a chapter 7 or a chapter 13 bankruptcy.