Top Seven Reasons for a Client Not to File Bankruptcy
In many cases, bankruptcy may not be the right solution
1. If all a debtor’s assets and income are exempt and the consumer debtor is "collection-proof," which means most creditors can do virtually nothing to harm the debtor even if the consumer debtor does not file bankruptcy.
Waiting until the consumer is collection-proof generally is a bad idea, and it’s never a good idea if there are assets that need protection from creditors and/or there is a concern with a home mortgage, car loan, or other secured creditor that has the ability to legally seize or foreclose on a debtors’ home or other assets. However, there are occasional cases where an elderly debtor has no assets or income that need protection and no desire to rebuild his/her credit; in such a situation, all that may be needed is a letter from the debtor/consumer's attorney invoking the debtor’s cease communication right under the Fair Debt Collection Practices Act, which may be just as effective in stopping debt collection harassment. See other article in the Bankruptcy Overview section of this website entitled “ Bankruptcy Exemptions”.
2. If the long-term expense of keeping a home or car exceeds long-term income, or if a consumer does not have sufficient income to keep up with payments while also catching up on past-due amounts owed on home mortgages, car loans, or other secured loans.
Bankruptcy can eliminate certain rights and obligations owed to secured creditors, and the bankruptcy filer can force secured creditors to accept past due amounts owed over time through the bankruptcy process; but generally speaking consumers cannot keep the collateral, whether it be home, car or other assets, unless they also prove their ability to keep current and actually keep current on all regular post-petition payment obligations to secured creditors as they become due.
3. If a consumer has valuable assets that are not exempt in the bankruptcy process, and the consumer does not want to lose these assets.
A Chapter 13 filing can still be the solution if the consumer can afford the necessary payments under the Chapter 13 bankruptcy plan, which would require that unsecured creditors be paid at least as much as they would have received if the nonexempt assets were liquidated in a Chapter 7 case. See other articles in the Bankruptcy Overview section of this website entitled “ Bankruptcy Exemptions”, and in the Bankruptcy Specific section of this website entitled “An Overview of the Ch. 13 Process”.
4. If the main reason for filing bankruptcy is to discharge a student loan, alimony, child support obligations, court restitution orders, criminal fines, or certain non-dischargeable taxes.
Many of these obligations are difficult, if not impossible, to discharge in bankruptcy. Some student loans though which were historically very difficult to discharge in a bankruptcy, have become much easier/less expensive to fully or partially discharge through a relatively new program instituted by the Department of Education to relax the stringent legal standards “good faith” federal student loan borrowers need to prove in order to receive a bankruptcy discharge of their federal student loan debt obligations. See the first 3 articles in the “Student Loan Obligation” section of this website.
5. If the reason is to protect co-signers on a consumer debtor's debts/obligations.
When a relative or friend has co-signed a loan and the consumer discharges the loan in bankruptcy, the cosigner may still have an obligation to repay all or part of the loan. However, in a Chapter 13 case, a co-signer is protected from collection actions when the debt is being paid in the consumer's Ch. 13 plan.
6. If a debtor only has a few debts and strong defenses for most of them.
Instead of filing for bankruptcy, the consumer/debtor can raise these defenses aggressively, either prior to being sued or in an answer or Counterclaim the debtor has a right to timely file in response to any lawsuit filed against them. While litigation is almost always stressful and very expensive, usually disputes can be settled out of Court in an acceptable way. If the debtor is unable to settle the dispute, and otherwise qualifies for bankruptcy protection, it is usually significantly less expensive for the debtor to file for bankruptcy relief rather than litigate with his/her creditor.
7. If a consumer has a prior bankruptcy, the consumer cannot receive a discharge in a new Chapter 7 bankruptcy for 8 years after receiving a prior Chapter 7 Discharge Order from a US Bankruptcy Court.
However, a debtor would still be able to receive a Ch. 13 Discharge Order as long as the Ch. 13 petition is filed at least 4 years after receiving a Chapter 7 Discharge Order.