“I can't pay all of my debts; should I file bankruptcy?”
This is the number one question I'm asked when I consult with women and couples who are experiencing financial hardships.
Contrary to stereotypical beliefs; most consumers file bankruptcy for 3 reasons:
- Because of Medical Expenses
- Because of Divorce
- Because of Unemployment
Did you notice that excessive spending was not listed?
The shame of being judged as someone that could not properly manage their money is why a lot of people who need to file don't. Don't let that be you.
1. Plan ahead of time
My first piece of advice is to PLAN AHEAD OF TIME! Pre-plan at least 3-6mths out.
2. Do NOT File when you are feeling desperate
When you are feeling desperate, don't file because you are not in control if you do.
3. Gather documentation
- Income from all sources; obtain recent paycheck stubs
- Calculate All of Your Debts (pull credit reports from annualcreditreport.com) – Obtain copies of unsecured debt statements, collection accounts; secured bills (mortgage, student, and auto loans), IRS info, judgments/liens, medical bills, recent bill of sales, etc
i. Review the debts and eliminate the ones that cannot be discharged (taxes, student loans, debts stemming from fraud, embezzlement, larceny; cash advances over $800 taken out within 90 days of filing, cash advances to pay off debts that can’t be discharged (student loans/tax lien); debts ran up or new debts 6mths prior to filing, excessive charging after attorney filed BK, )
ii. If your tax lien is over 3+yrs it may be eligible for chapter 7 bk
iii. What is left over?
4. Create A budget
You’ll need to do this anyway as a requirement for bankruptcy. YOU create your budget; a bankruptcy attorney/credit counselor can start you off or offer suggestions but you put the stamp on it, DO NOT LET THEM DO THIS FOR YOU ESPECIALLY FOR A Chapter 13.
A. Analyze your budget; can you pay off your debts in 3 years? (during this time STOP CHARGING AND ADDING ON NEW DEBTS; if they can prove you knew you were filing and still digging yourself further and further into debt, this can sabotage your bankruptcy filing).
5. If BK is still an option; review your Means Test for your state
This will let you know which chapter will work best for you based on your income. YOU determine and plan on which BK to file, do not rely on the attorney. The Means Test looks at Median Income & Debt to Income Ratio. Per bankruptcy law your median income cannot exceed 25% of your income or you'll have to file chapter 13 (listed on dept of justice website). If you want CH 7; you’d want your expenses and income to be even or negative. I’ve seen a $25 positive income and trustee forced a chapter 13. The primary purpose of looking up the means test is to compare your current income to your state’s median income. A good attorney will work with these numbers to ensure you file for the chapter that works for you:
- Work with you to decrease your income (reduction in hrs or change in employment because spouse becomes unemployed (leave of absence counts)
- Your expenses increase that will allow you to $0 out any positive net income when you calculate debt-to-income ratio (must be realistic and explainable.Do not over-manipulate the income and expenses to qualify for a better BK deal; if found out you will be punished). This is why time is important; if you rush this you can play with the numbers. You’ll want to compare your current income with the median income.
- Make A list of any assets you’d like to protect, keep and/or reaffirm and how much $ you’d like to keep.
- Set Aside enough funds to handle all BK expenses.
- Consumer credit counseling buys you time until you are ready to file on your terms
i. YOU negotiate the payment plan don’t give them that control
6. Consult with a minimum of 3 BK attorneys
Ensure you ASK SEVERAL QUESTIONS. I've left a checklist to assist you here.
Below is a Periscope Broadcast where I discussed this topic in detail, in addition to answering questions from consumers who were interested in filing.
Hope this helps!