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When Should I File?

When is it time to file?

Many people wait longer than they should before consulting a bankruptcy attorney. In my experience, most people seem to wait until they have used all available resources and can’t pay next month’s expenses, but postponing filing for bankruptcy is not good for debtors. It’s similar to delaying going to the doctor, because you’ll end up with more problems, in my experience and according to Robert Lawless, professor of law at University of Illinois, in an article titled, "Only a fraction of those in need to file for bankruptcy", by Christine Dugas, USA Today, June 9, 2010.

When you start having problems paying your bills, or suffer a financial reversal: lose your job, lose overtime, become disabled, have a car repossessed, you get behind on your mortgage or vehicle loans, your business starts to fail, or you just know that you are in trouble; you should contact a bankruptcy attorney before you make decisions that eliminate some of the protection, or benefits, that bankruptcy could provide for you. Once the downward spiral starts, it tends to only get worse. Waiting and hoping can leave you in a worse position, and wishing you had filed earlier. Get information early so you can make an informed decision.

Compare your Income and Expenses

One of the best methods of evaluating your financial position is to sit down and list your net monthly income (what you take home after taxes and other deductions), and compare your income to one month’s living expenses, everything that you need to pay throughout the year, including: mortgage or rent, utilities (electric, heat, telephone, cable TV, trash collection), cell phones, vehicle payments, food, clothing, medical expenses, car insurance, property insurance and property taxes if not included in your mortgage payment, life and health insurance, gasoline for your vehicles, vehicle repair and maintenance, any other tax that is not withheld from your income, child care, pet care and food, etc., and don’t forget haircuts, school lunches, work lunches, cigarettes, recreation and entertainment expenses, tax preparation, car registration expenses, and all the other little things you pay for. Many people who are in financial trouble have more expenses than income, or little or nothing left after paying their living expenses. If the amount that is left to pay your debts is only enough to pay the interest, only enough to pay minimum payments on credit cards, or not enough to form any plan to repay all of your debts, then you have four choices: increase your income, lower your expenses, find a credit counseling company that can pay all of your debts with a monthly payment that you can afford for a reasonable period of time, or if you can’t come up with a reasonable plan, consult with a bankruptcy attorney, to see what debt relief is available.

Some other signs that you may need to file are:

  • You are not paying anything on your credit card bills, or if you have substantial credit card debt, and are only paying the small debts, it may be time to consider the debt relief that bankruptcy can provide.
  • Using payday loans, cash advance companies, title loans or paying high default interest rates. It is very hard to improve your financial situation while paying these high interest loans.
  • Spending your savings or selling assets, to keep paying your bills. You are entitled to keep most of your property. Find out how much.
  • Using a home equity loan to pay your credit card debts, or other unsecured loans. This can turn a dischargeable unsecured debt, into a secured debt that you will have to pay, and can lower that value of the property that you can keep.
  • Cashing in your IRA, 401K or other retirement account to pay debts. In most states, including Delaware, these assets are exempt and can be kept in a bankruptcy without having to pay unsecured creditors. You should be able to afford to retire at some point.
  • Paying on credit card debt, to keep those payments current and avoid higher interest rates, while getting behind on your house or car payments. In order to keep your home and vehicle, you are going to have to pay those payments. Therefore, mortgage and vehicle payments are the priority.
  • Accumulating debts that you are unable to pay, like medical bills or deficiencies from car repossessions. If you don’t have a plan to pay all of your debts, not knowing of a way out may be an indication that you will never be able to get out of debt.

Basically, most people want to avoid bankruptcy, and, too often, they don’t fully consider it as an option until their financial situation is horrible. They keep hoping things will change: that their income will return to what it was, or the business will become profitable, for example. Get counseling and advice before your situation is hopeless and make informed decisions. You are entitled to hang on as long as you can, but do it knowingly, and with an understanding of what your financial position is as you move forward and whether you are spending money to pay debts that you probably should, and could, keep for your own future.
Unfortunately, it costs money to file bankruptcy. Don’t wait until you have nothing left and can’t even afford to file.

There are circumstances where bankruptcy may not be the answer:

  • Some people are judgment proof. There is no way for their creditors to collect from them even if the creditor gets a judgment and attempts to execute. However, if you receive a paycheck, it can be garnished or attached to collect any debt.
  • If your debts are old debts, the creditors may not be able to sue you to collect, due to the statute of limitations that bars most claims after about three years.
  • In some cases a reputable credit counseling company can work out a reasonable payment plan that will enable you to repay your debts over a reasonable period of time (3 – 5 years, perhaps). Make sure it is a payment plan that you can afford, that you are paying off all of your debts, and that you know how long you will have to pay.
  • If your financial problems are the result of child support or alimony obligations, debts for tax withholding, income tax debts for returns filed in the last three years, or student loans, bankruptcy will generally not discharge, or eliminate, those debts.
  • Occasionally, mortgage modifications can resolve your problems. Even when mortgage modification is not a solution, you can pursue it in conjunction with bankruptcy. Contact the government approved programs (federal and state) or your lender for assistance. Be careful about scam artists that try to take advantage of distressed homeowners and try to get you to pay them for help.
  • Short sales and deeds in lieu of foreclosure can also be solutions to your mortgage problems. However, if you are losing your home, you probably should look into a fresh start through bankruptcy, and eliminating your other dischargeable debts.
  • If you have substantial assets, you may have to pay most, or all, of your debts in a chapter 13 bankruptcy, and if there is another plan available to pay your debts it is worth considering. A chapter 13 can provide an affordable plan that your creditors are forced to accept.

James C. Reed is an attorney that you can relate to, be comfortable with, and who will explain your legal rights to you. Get advice from someone who cares about your unique situation and wants to help you. Don’t rely on a secretary or paralegal with limited knowledge, and be processed in a high volume business where you are just another number.