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When people face heavy debt, it can often seem as if there is no end in sight. Between debt collectors and payment reminders, the stress is real. Eventually, many people ask themselves whether bankruptcy is a viable solution to their debt. Depending on the kind of debt you have and your financial situation, the answer is often a resounding yes.
Let’s cover some points to consider when deciding whether bankruptcy is right for you.
More than 750,000 individuals and businesses needed bankruptcy to reduce or eliminate their debt in 2018. This number has fallen dramatically since its peak in 2010, when it reached 1.5 million bankruptcies. However, it is higher than 2017’s 685,000 filings. Household debt was at $13 trillion in 2017, including $8.8 trillion in mortgage debt, $1 trillion in credit cards, $1.4 trillion in automotive loans, and $1.4 trillion in college loans.
Can Bankruptcy Eliminate My Debt?
Student loans are some of the most difficult to eliminate through bankruptcy since they involve proving undue hardship. However, most other forms of debt are far easier to eliminate or reduce to lower levels. Still, bankruptcy can be difficult for many people, both emotionally and socially. Working up the courage to file can take time. Often, people realize they need to file because of a single event, such as a lawsuit. However, there is no need to wait for another financial event to realize bankruptcy is right for you.
What About Retirement?
Some people will delay filing for bankruptcy by dipping into retirement savings, but this just delays the inevitable and can even exacerbate financial problems. If you are younger than 59½, tapping your retirement savings to pay off debt will likely leave you with a 10 percent early withdrawal fee. Plus, you will have to pay income tax on your withdrawal. There are all things to avoid. Retirement savings, including any 401(k)s and IRAs, are usually protected during bankruptcy. Inherited IRAs are often the exception. Traditional and Roth IRAs are protected up to a set amount (about $1.28 million). Anything exceeding that amount may be required to use to pay creditors. If you are already receiving retirement income, that income may not be protected, either.
Your Filing Options
There are a few ways you can file bankruptcy, but most people use Chapter 7 or Chapter 13. Both have filing fees that generally cost a few hundred dollars. Additionally, an attorney could cost anywhere from $1,200 to $3,500. The exact costs depend on the specifics of your situation and where you live. Generally, people filing for bankruptcy stop paying their debts and put that money toward bankruptcy-related costs.
Bankruptcy is governed by federal law, but different states have unique specifications for which types of property can be sold to repay creditors. Wedding rings up to a certain value are an example in some states. Both types of bankruptcies stop creditors and debt collectors from calling, garnishing wages, and often even lawsuits. Previously existing court judgments are more difficult to eliminate.
Different people qualify for different types of bankruptcy, and each type treats debt differently. Chapter 7 is usually for those who do not have enough money to repay debt. They also usually lack valuable assets. This makes it the most common way individuals file for bankruptcy, as it eliminates credit card debt, personal loans, and even medical bills. However, your car may still be repossessed, and your home may still enter foreclosure.
Chapter 13 often gives people between three and five years to repay debt while keeping their assets. This type also stops creditors from garnishing wages and putting levies on bank accounts. However, this type of bankruptcy necessitates that you have income and your debt is below a certain amount (a total of $1.5 million). Those who have debt above $1.5 million may find a better choice in Chapter 11 bankruptcy, though this is the least common type used by individuals.
Impact on Your Credit
Unfortunately, bankruptcy negatively affects your credit. In exchange for reducing or eliminating your debt, your credit report lists that you filed. Often, though, people filing for bankruptcy already have damaged credit from their unpaid debts. While bankruptcy stays on your credit report for up to 10 years, the impact on your credit is reduced over time. Most people who file for Chapter 7 are eligible for home loans in just four years. Filing for bankruptcy or even just considering bankruptcy-related options can be intimidating, but it is often the only viable solution to debt.
Written by John J Scura III, Esq. Partner, Scura, Wigfield, Heyer, Stevens & Cammarota, LLP
John has been Certified by The Supreme Court of New Jersey as a Civil Trial Attorney. Whether it is a personal injury case, bankruptcy case, litigation case or other type of matter, John wants his clients to participate in the decision making process toward solving their problem in the best way possible.
