I get calls every day from people considering filing bankruptcy. I consider myself a filter for the bankruptcy system. I keep people out who don’t belong in the system, and put them in if they would benefit from the process.
The following are some of the criteria I apply as I filter whether each person would benefit or not from filing bankruptcy.
Does this person need bankruptcy protection?
Protecting debtors during a crisis is really a prime function of the bankruptcy process. That is why the automatic stay is such an integral part of the process that begins on the moment the case is filed. I ask whether there is wage garnishment, a foreclosure, an eviction or some other event in the near future that the automatic stay can assist to prevent. Others don’t need any protection, like a widow or widower with only social security income and no property may not need the protection.
Is this person insolvent?
This means are they financially upside down, such that their assets are less than their debts (healthy finances are the opposite) or is their cash flow sufficient to meet their obligations. The first is balance sheet insolvency, the second is cash flow insolvency. Some people are one are the other, many suffer both kinds of insolvency. For example, an unemployed person whose been out of work for a year may be cash flow insolvent, and may even be facing foreclosure, but if they have $500,000 of equity in their house, they are not balance sheet insolvent. The Chapter 7 Trustee may be able to sell their house. If they have since found employment they can use a Chapter 13 bankruptcy. If no employment is on the horizon, they may need to make some non-bankruptcy decisions.
Insolvency is not legally necessary to file bankruptcy, but it is the financial problem bankruptcy is meant to solve. It is rare that bankruptcy should be used on solvent individuals or companies. Insolvency can be like financial cancer, and only bankruptcy will cure it. However, it takes a professional to figure out whether a bankruptcy will help our hurt any given situation.
Is bankruptcy a good investment in your credit future?
For some people, wiping the slate clean improves credit dramatically in a one-year timeframe. For others, the gains are not as significant. I like to assess that as one component.
Is the amount of the debt significant and disproportionate to the person’s income?
For some people, a mere $10,000 in debt is catastrophic to their income if they have very low earnings. Others can easily handle $50,000-$100,000 of unsecured credit card debt if they are very high earning debtors. It’s really a matter of assessing the proportionality.
What kind of debt is it?
A very small amount of pay day loans or title loans can be devastating due to the high interest rates. Student loans have become more of a problem lately, but as long as they helped leverage up income, they are productive debt, and usually not dischargeable in bankruptcy anyway.
If all the debt is not dischargeable, such as recent taxes, student loans, child support, government penalties etc. then a bankruptcy will not benefit the proposed debtor in Chapter 7, although a Chapter 13 might be appropriate.
There are many other criteria that must be considered, and we do in the free consultation. This webpage would get too long even if we just listed the common criteria.
Ultimately, it is always you who must decide whether bankruptcy is right for you. Anyone who files has to sign a “Voluntary Petition.” It says right on it that it’s voluntary. Involuntary bankruptcy is as rare as a two headed turtle.
So it’s really a matter of getting the right counsel to make the determination, because you need someone who not only knows the law -- and not only knows how it’s practiced-- but someone who can find out what’s important to you--- so you can make the decision.
Even then, no one wants to do it, and there’s always a huge amount of internal conflict within someone making this difficult decision. But if it’s clearly in your best interest, then you need someone who will support you in multidimensional ways to go through the process, both logistically, strategically as well as emotionally.
