If you have so much debt to worry about and your income doesn’t seem to be improving anytime soon, declaring bankruptcy might seem like the only option. However, while filing for bankruptcy could help you deal with debt it should only be used as the last resort due to the consequences.
Here are several questions to ask yourself before filing for bankruptcy to make sure it is the right option for you.
- Is bankruptcy the only option?
Before filing for bankruptcy, you should check and ensure that you’ve exhausted every other available option. You can start by contacting your lenders and asking them if they can work out a new payment plan. Most lenders would agree to create a new payment for you than having to lose it all when the court discharges your debts if you declare bankruptcy. To pay your debts, you can sell some of your assets, spend frugally, or take up another job. All these measures should first be exhausted before you file for bankruptcy.
- Chapter 7 or Chapter 13?
There are two types of bankruptcy that can be filed by individuals: Chapter 7 and Chapter 13. Each type has its own benefits and woes. If don’t have any means of paying back your debt, then Chapter 7 would be your best option. However, if you have a steady income source, then you can file for Chapter 13. If you go for Chapter 7, you may lose all or some of your assets as they will be liquidated to pay some of your debts. Chapter 13, on the other hand, is the right option if you don’t want to lose your property and you can stick to a 3 to 5-year repayment plan for your debts. With Chapter 7, you would have to sell all your assets except the ones you can exempt. This includes every valuable property in your possession. This could mean your second car, home (if you’re a homeowner), and appliances. You should consider your options and discuss them with your attorney before making a decision.
- What are my exemption options?
The type or value of assets you can exempt in your bankruptcy case would depend on your State. Some states use their own exemptions while some use the federal exemptions. Nevada’s exemptions can be found in NRS 21.090. You may be allowed to exempt an entire property or just the value of a property. This means you might be allowed to exempt your car or just $20,000 worth of your property. This all depends on the equity of the property.
- Will my debts be discharged by filing for bankruptcy?
If you file for Chapter 7 bankruptcy, you can actually have your debts discharged. These are usually unsecured debts that do not require collateral. If your debt profile consists of unsecured debts like personal loans, medical bills, and credit card, then you can have most of these debts discharged. However, if you have secured debt like car loans, mortgage, student loans, alimony, and child support, you would have to continue paying these debts until they are cleared.
- Can I afford it?
Filing for bankruptcy isn’t free. It’s not just the lawyer fees you have to worry about, there are filing costs as well. When you add that to your attorney fees, you might have to spend a lot just to declare yourself bankrupt. This might be counterintuitive considering you’ve already run out of enough money to pay your debts. But nothing in life is free and attorneys have a job to do and need to get paid.
- Do I qualify?
Filing for bankruptcy is not as straightforward as it was before. There are more obstacles like additional filing requirements, skyrocketing fees, and increased liability for lawyers representing debtors. When you decide to declare bankruptcy, you will have to pass a means test. Your attorney will require you to fill out extensive paperwork so that they can ascertain whether declaring bankruptcy is the best option for you. This is a good thing because it’s best to know upfront if you qualify, rather than after you have spent hundreds or thousands of dollars.
- Can I stick to the repayment plan?
If you decide to settle for a Chapter 13 bankruptcy, then this question is very important. When you file for Chapter 13, the judge will put you on a three-to-five-year repayment plan to clear all your debts. You must be able to completely pay your debts within the period and stick to the plan every month.
- Will bankruptcy be worth it?
Not all debts are dischargeable by bankruptcy so you should consider every option available. If you have mostly secured loans, it is best to discuss with your creditors and ask for a better repayment plan.
- Can I live with the negative effects for years to come?
When filing for bankruptcy, you would have to deal with the heavy blow to your credit score. A low credit score and a bankruptcy case in your credit history means high insurance premiums and loan rates, high interest rates, and stigma from lots of borrowers. Note that your bankruptcy will remain in your credit history for up to 10 years. However, most debtors are able to rebuild their credit score within 2 years. If you have any future financial goals, it is important that you keep this at the back of your mind.
- Will I be able to make better financial decisions after filing for bankruptcy?
Filing for bankruptcy the first might give you a soft landing away from debt, however, if you don’t make the right financial decision, you might have to repeat the process all over again. When you go bankrupt, it is important that you live within your means. Declaring bankruptcy means that you will lose your credit cards which is a good thing because you won’t be able to spend more than you can afford. You will also have to build back your financial status. It is important that you get financial counseling from a government-approved company so that you can better manage your finances. You can also use budgeting apps to help you make better use of your money.