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Bankruptcy: When Should You File?

June 3rd, 2013 Blog

Debt habitually grows overnight and can become both a nasty surprise and burden for businesses and individuals alike. Understanding when you can handle your debt appropriately and when filing for bankruptcy protection is acceptable is an important distinction to make. There are several guidelines that should be considered when debating pulling the trigger on bankruptcy.

It’s appropriate to file for bankruptcy protection:

If you’ve already tried to negotiate with your creditors and they refuse to structure a lower monthly payment over a period of time, you may consider bankruptcy. If you don’t have the means to make the payments, it may be one of the best options.

If your liabilities are larger then your assets and the amount of money required to pay your monthly debts exceeds your income.

If you want to keep your Individual Retirement Account (IRA). A Federal bankruptcy law that was passed by the Supreme Court in 2005 provides protection for IRAs from creditors.

What does each type of bankruptcy look like?

If an individual files for chapter 7 protection, they may receive protection for assets that have secured claims and may be dismissed from their debt within 90 days, and will be allowed to keep the assets that are exempt under state law. Washington State law includes household appliances, property worth no more than $125,000, and clothing and ornaments worth no more than $1,000 in their exemptions.

Filing for chapter 11 protection allows you to try to get your affairs in order while still being in control of your assets. This is a good restructuring option for both businesses and individuals.

Chapter 13 protection forces individuals to create an approved payment plan that is determined by their income and required expenses. This ensures a certain amount of money is given to the creditors over a period of time and allows individuals to maintain a regular income while still keeping their assets. Once the debt is finished, the individual is relieved from the plan.

Bankruptcy protection is considerably different for individuals then for businesses. While one type of protection may be right for an individual, it could be death for a company.

What happens after you file?

Bankruptcy is considered a public record that anyone can look up. This is something to consider if you are a fairly private person as it will come up in a background check. Keep this in mind if you are seeking new employment

You will likely be seen as an increased risk when applying for unsecured loans on investments like as cars and houses. Lenders may require a larger down payment, an increased interest rate, or both before approving the application. In some cases, you may find it challenging to borrow money for a few years.

Your credit will take a hit, which will play a major role in determining whether lenders will be willing to approve any loan applications. Be sure to get your credit report before making your decision because your score will be effected after you file. Keep in mind that credit agencies are allowed to report your bankruptcy for up to 10 years under the Fair Credit Reporting Act.

It all comes at a price:

Filing for bankruptcy protection typically costs a few hundred dollars. You can go the road alone without an attorney if you want to save money, but this is strongly discouraged. Bankruptcy attorneys provide a wealth of knowledge and experience to their clients that can help them on an individual basis. Inexperience and lack of legal counsel may result in the lose of property and rights. You may also look into the aid of a credit counselor to help you try to lower your debt.

The Law Offices of David Smith understand that filing for bankruptcy is not an easy decision to make, which is why we offer free consultations. Give us a call at 253-272-4777 or contact us online to schedule an appointment today!

Sources: Forbes, Washington Bankruptcy, and Investopedia.