Should You File for Bankruptcy or Do Nothing?

If you're having a hard time paying your debt, bankruptcy can help you get your finances in order. However, you may not need to file for bankruptcy right away—or at all. Here are some important points to think about before making a decision:
 

• What do you own that creditors (the people or companies you owe money to) could take from you?
• Will bankruptcy get rid of most or all your debt?
• Can you keep your important belongings, like your house or car?
• Are there other ways to solve your debt problem besides bankruptcy?

The goal is to figure out if creditors can really come after you. In some situations, doing nothing for now might actually be your best choice.

Read more: Bankruptcy Demystified: Understanding Chapter 7, 11, 12, and 13 Terminology
 

When Doing Nothing May Be Best

First, you need to look at your own financial situation:

Are You "Judgment Proof"?

Creditors usually need to take you to court and win before they can take your property. If you don’t have anything they can take—even if they win a court case—you are known as "judgment proof." In this case, you probably don’t need to file for bankruptcy.

You are usually judgment proof if:
 

• You don’t own a house or other major assets.
• What you own is protected by state law (called exemptions).
• You do not have a job, or you make very little money.
• Your only income is from sources creditors can't touch, like Social Security, unemployment, or some public benefits.

However, being judgment proof may only be temporary—if your money situation improves later, creditors might still come after you.
 

Will Bankruptcy Get Rid of Your Main Debts?

Not all debts can be erased in bankruptcy. Before filing, check if your most stressful debts will go away. If bankruptcy won’t erase these debts, it might not be worth it.

Some debts that are hard or impossible to eliminate in bankruptcy include:

Child Support

Filing for Chapter 7 bankruptcy won’t get rid of child support owed. Chapter 13 bankruptcy lets you pay back overdue child support with a court-supervised payment plan, but you still have to keep making your regular payments, too.

Falling behind on child support could mean losing unemployment benefits, having tax refunds taken, or even losing your driver’s license or passport.

Past Due Taxes

If you owe back taxes, the government can take your property or money, such as tax refunds or part of your wages. Bankruptcy usually won’t erase recent tax debts, but with Chapter 13, you may be able to pay them off gradually.

Student Loans

Student loans are very hard to get rid of in bankruptcy. You have to prove they cause you extreme hardship, which is tough. If you don’t pay, the government can take money from your paycheck or tax refunds.
 

Can Bankruptcy Help You Save Your Home or Car?

 

• Chapter 13 bankruptcy can help if you're behind on your house or car payments by allowing you to catch up over time.
• Chapter 7 bankruptcy might help if it frees up money by erasing other debts, but you usually need to be up-to-date on your house or car payments to keep them.

 

Are There Other Solutions?

Before choosing bankruptcy or doing nothing, check out other options like credit counseling, negotiating with creditors, or debt management plans.
 

Talk to a Bankruptcy Lawyer

Deciding what to do is not always simple. Consulting a bankruptcy attorney can help you figure out your best bet. They can explain if bankruptcy is right for you or if another option might work better.

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