When Is Filing Bankruptcy a Good Option
Mounting debt can easily cripple a family’s financial well-being. According to data from credit reporting agency Experian, the average American carries over $96,000 in debt. When facing insurmountable debt situations, individuals and families can find relief by filing for bankruptcy. However, bankruptcy is not an easy decision. Several factors must be considered before filing to ensure it is the best option.
Reach out to The Law Offices of Marc G. Alster for guidance on finding a path forward. The firm proudly serves clients throughout northern and central New Jersey counties, including Bergen, Passaic, Hudson, Essex, and Union, as well as counties in New York such as Rockland, Westchester, Orange, and Putnam. Set up a consultation today to get a foothold on your financial situation.
Assessing Your Current Financial Situation
Assessing the current financial situation involves gathering information about income, expenses, assets, and debts. Here are steps to take to assess an individual’s financial situation:
Review income sources. Start by reviewing income sources, including wages, self-employment income, investments, and any government benefits received. It’s important to get an accurate income picture, including any fluctuations or changes over time.
Track expenses. Next, track expenses, including fixed ones (like rent or mortgage payments) and variable expenses (like groceries or entertainment). Tracking can be done by reviewing bank statements, credit card bills, and other financial records. Categorize expenses into essential and discretionary categories to better understand where the money goes.
Calculate net worth. Add assets (like savings, investments, and property) to calculate the net worth and subtract debts (like mortgages, loans, and credit card balances). This calculation will help provide an overall picture of an individual’s financial health.
Review debt. Review your debt, including the type of debt, interest rates, and minimum payments. This review will help determine if debt management is effective and if any adjustments need to be made.
Evaluate savings and investments. Review savings and investments to determine if there are enough retirement savings or funds for other future goals. Evaluate the risk level of your investments to ensure they align with your goals.
Assess credit score. Review credit scores to determine if a good credit history is in place. Check for any issues that need to be addressed, such as high debt balances or missed payments.
Understanding Bankruptcy Options
When doubt becomes too much to handle, bankruptcy may be a viable alternative. There are two popular bankruptcy options to consider:
Chapter 7 Bankruptcy
Chapter 7 bankruptcy allows individuals to eliminate certain debts and get a fresh financial start. It also comes with significant consequences and should be considered carefully. It’s important to speak with a bankruptcy attorney to understand the specific implications of filing for Chapter 7 bankruptcy. Consider the following aspects:
To be eligible for Chapter 7 bankruptcy, an individual must pass the “means test,” which involves comparing their income to the median income in their state. If their income is below the median, they are eligible for Chapter 7. If their income is above the median, they might still be eligible if they can demonstrate that they do not have enough disposable income to repay their debts.
Under Chapter 7 bankruptcy, certain debts can be discharged or eliminated, including credit card debt, medical bills, personal loans, and other unsecured debts. However, some debts are not dischargeable, including most tax debts, student loans, child support, and alimony payments.
In Chapter 7 bankruptcy, a debtor’s non-exempt assets are sold to pay off their creditors. However, many assets are exempt from liquidation, including a certain amount of equity in a home or car, household goods, and retirement accounts.
When a debtor files for Chapter 7 bankruptcy, an automatic stay is put in place, which stops creditors from taking any collection actions against the debtor. This situation includes foreclosure, wage garnishment, and repossession.
Filing for Chapter 7 bankruptcy can significantly impact a person’s credit score, and the bankruptcy will stay on their credit report for up to 10 years. However, it may also be a fresh start for individuals overwhelmed by debt and unable to pay their bills.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows individuals with a regular income to reorganize their debts and make payments over time while potentially eliminating certain debts. The following points underscore how chapter 13 bankruptcy works:
To be eligible for Chapter 13 bankruptcy, an individual must have regular income. An individual must also have unsecured debts and secured debts no greater than a certain amount. If a debtor’s income is too high for Chapter 7 bankruptcy, or they have non-exempt assets they want to keep, Chapter 13 may be a good option.
Under Chapter 13 bankruptcy, the debtor proposes a repayment plan to their creditors that outlines how they will repay their debts over three to five years. The plan must be approved by the bankruptcy court and meet certain requirements.
In Chapter 13 bankruptcy, some debts can be discharged or eliminated, at the end of the repayment plan period, including credit card debt, medical bills, personal loans, and other unsecured debts. However, some debts are not dischargeable, including most tax debts, student loans, child support, and alimony payments.
Like Chapter 7 bankruptcy, Chapter 13 bankruptcy also includes an automatic stay, which stops creditors from taking any collection actions against the debtor.
Filing for Chapter 13 bankruptcy can also significantly impact a person’s credit score. Still, the impact may be less severe than Chapter 7 bankruptcy, as the debtor is trying to repay their debts rather than eliminating them.
Debts Not Forgiven by Filing for Bankruptcy
Not all debts can be forgiven by filing for bankruptcy. Here are some examples of debts that are generally not dischargeable in bankruptcy:
Most tax debts, including income tax, property tax, and other taxes owed to the government
Generally, student loans are not dischargeable in bankruptcy unless the debtor can demonstrate that paying the loans would impose an undue hardship.
Debts that were obtained through fraud or misrepresentation
Debts related to court-ordered alimony and child support payments
Fines and penalties owed to government agencies or other organizations, such as traffic tickets or criminal fines
If a debtor was found liable for personal injury or wrongful death caused by driving under the influence of drugs or alcohol, the resulting debt is not dischargeable in bankruptcy.
Assets Potentially Affected by Filing for Bankruptcy
The types of assets that can be affected by filing for bankruptcy vary depending on the type of bankruptcy and the specific circumstances of the debtor. Key to understanding when filing for bankruptcy might be a good option is understanding how different types of assets may be affected by bankruptcy:
Home. In Chapter 7 bankruptcy, the debtor’s non-exempt assets, including their home, may be sold to pay off creditors. However, most states have exemptions that protect a certain amount of home equity. In Chapter 13 bankruptcy, the debtor may be able to keep their assets, including their home, and repay their debts through a repayment plan.
Car. In Chapter 7 bankruptcy, the debtor’s non-exempt assets, including their car, may be sold to pay off creditors. However, most states have exemptions that protect a certain amount of car equity. In Chapter 13 bankruptcy, the debtor can keep their assets, including their car, and repay their debts through a repayment plan.
Pensions. Generally, most pensions, including 401(k)s, IRAs, and other retirement accounts, are protected from bankruptcy. In Chapter 7 bankruptcy, the debtor’s non-exempt assets, including their pension, may be sold to pay off creditors. However, most states have exemptions that protect a certain amount of retirement account balances. In Chapter 13 bankruptcy, the debtor can keep their assets, including their pension.
The Legal Guidance You Deserve
Bankruptcy might be a great option for you and your family. The Law Offices of Marc G. Alster provide professional debt relief counsel for individuals looking to get their debt under control. Reach out to Mr. Alster today to speak with a skilled bankruptcy attorney in New Jersey.
From his office in Hackensack, New Jersey, Attorney Alster's services extend throughout the state of New Jersey, as well as New York. Some areas he serves in New Jersey are Passaic County, Bergen County, Hudson County, Essex County, and more; in New York, he serves Rockland County, Queens, and the Bronx.