Why Do People File for Bankruptcy?
Filing for bankruptcy is often thought of as a sign of failure. At best, it is seen as a last resort when faced with too many bills, collection letters, or lawsuits. However, bankruptcy offers filers many advantages that other options do not. Bankruptcy is governed by federal law that protects the debtor and limits the actions their creditors are permitted to take. This breathing room alone is sometimes worth the cost of filing.
There are as many reasons why people file for bankruptcy as there are people filing. Whether you are overwhelmed with credit card bills, dealing with a pending sheriff’s sale, or are years behind in your taxes, bankruptcy could provide a viable option to get back on your feet. Furthermore, there are many advantages in addition to merely discharging the debt.
Bankruptcy is generally misunderstood. Many people have misconceptions regarding the process, the advantages, and the disadvantages. At Young, Marr & Associates, our experienced Philadelphia bankruptcy attorneys are committed to answering any questions potential filers might have and offering additional options that filers probably never considered. To discuss the pros and cons of filing for bankruptcy, call our law offices at (215) 701-6519.
Stop Creditors by Filing for Bankruptcy
Creditors have many tools at their disposal to collect on a debt. From harassing phones and letters to obtaining a judgment lien against your home, bank account, or personal property, the law permits creditors to aggressively pursue delinquent debtors. Filing for bankruptcy stops creditors in their tracks.
The moment your bankruptcy is filed with the court, an injunction goes into effect that severely restricts what creditors are allowed to do. Often referred to as an automatic stay, this injunction protects you from both the harassing conduct and legal remedies creditors employ. For example, once you file for bankruptcy, all phone calls, letters, emails, and other forms of communication from your creditors must cease. A violation of this injunction could result in court-imposed fines.
More importantly, bankruptcy will stop any pending legal actions and prohibit your creditors from filing new or additional lawsuits. Many bankruptcies in Pennsylvania and New Jersey are filed to stop a foreclosure or sheriff’s sale. For some homeowners, bankruptcy is the only way to save their family’s residence.
When a creditor obtains a judgment through the courts, it could place a lien on your bank account. When this occurs, access to your account will be frozen and your bank will have to turn over your savings to your creditor. Filing for bankruptcy not only stops this, but it will also unfreeze your account, so you once again have access to your money.
Eliminating Debt by Filing for Chapter 7
People in the Greater Philadelphia area and South Jersey file Chapter 7 more than any other type of bankruptcy. Through Chapter 7, an individual or couple could eliminate, or discharge, the majority of their unsecured debt, including credit cards, medical bills, personal loans, some tax obligations, certain utility bills, and other debts.
When someone has defaulted on multiple credit card bills and is receiving collection letters in the mail, filing for bankruptcy might be an easy decision. However, if you can only pay the minimum payment on several credit cards or are always transferring balances to stay ahead of your creditors, filing for bankruptcy should be on the table. If you are eligible, you could eliminate the debt within five to six months, putting yourself back on the road to financial stability.
By Filing for Chapter 13, You Could Pay Your Debts Through a Court-Approved Payment Plan
If someone makes too much money to file for Chapter 7, a Chapter 13 bankruptcy is another possibility. You could try to negotiate payment plans with your creditors if you are unable to pay them all in full. When you do this, the creditor has all the advantages, including obtaining an enforceable court judgment against you. Furthermore, you will probably have to pay a considerable amount of the total back within a short period.
When you file for Chapter 13, you will pay your creditors through a court-approved bankruptcy plan. A bankruptcy filer will have to pay a monthly payment to a court-appointed trustee. These funds will be disbursed among your creditors that file valid claims in your case.
While this does not sound as good as eliminating your debt, there are advantages. First, the amount you are required to pay is not based on the debt you owe but on your ability to pay. Part of the bankruptcy paperwork that is filed in a case is the means test. The means test looks at your monthly household income and a number of allowable expenses and deductions to determine your “disposable monthly income.” This amount must be paid to your creditors. Our Philadelphia bankruptcy lawyers will calculate this amount before your case is filed, so you will know if filing for Chapter 13 is in your best interests.
To illustrate how Chapter 13 works, imagine you owe a total of $40,000 to five credit card companies. After the means test is completed, it is determined you have $200 of disposable monthly income available. Therefore, you would pay $200 a month to your creditors for 60 months, or a total of $12,000. The remaining $28,000 would be discharged.
The other advantage to paying creditors through bankruptcy is that there are no tax obligations on the discharged debt. When you negotiate a settlement with a creditor, any forgiven debt is considered income. Therefore, you could owe federal tax on any forgiven debt. When the debt is eliminated through bankruptcy, it is not considered income and not taxable.
Other Reasons Why You Should Consider Bankruptcy
Other benefits of bankruptcy are not commonly known. For example, if you have a second mortgage and your home is worth less than your first mortgage, you could eliminate the second mortgage. For homeowners who lost equity over the years or paid too much for their homes, this could be a financial lifesaver.
Cars often depreciate faster than any other asset. If you are paying off a car and owe more money than the vehicle is worth, you might be able to lower your payments through bankruptcy. This option is only available under specific circumstances, so it is important to review your situation with one of our Pennsylvania bankruptcy attorneys.
If your driver’s license was suspended for not having insurance or because you owe money for delinquent tickets, filing for bankruptcy could offer a means to have your license reinstated.
Lenders are not required to go through the court system to repossess a vehicle when you have fallen behind on your monthly payments. Filing for bankruptcy will stop your car from being repossessed. If it was already taken, you might be able to have it returned if you file for bankruptcy fast enough.
Advantages of Filing for Bankruptcy
There are many reasons why someone should consider filing for bankruptcy. If you are unsure, the first step is to call and speak with one of our knowledgeable Allentown bankruptcy attorneys at Young, Marr & Associates. Only by reviewing your particular situation in detail will you know if bankruptcy is your best option. Nonetheless, it is important to remember some of the many advantages of filing a Chapter 7 or Chapter 13 bankruptcy.
- All phone calls and bill collections immediately cease.
- Immediately stop interest charges on credit cards.
- Provides an orderly form of repayment on your debt.
- You may be able to reduce car payments and mortgage payments.
- May allow for reinstatement of a driver’s license if it was suspended because of an auto accident without insurance.
- Allows you to get rid of Judgments, bank garnishments, and wage attachments.
- Allows you to catch up on car and home payments.
- Allows you to stop utility shut-offs or regain utility service.
- Allows you to improve your credit scores while discharging delinquent credit.
- Allows you to become current on past due mortgage or car payments.
- Stops all foreclosure actions and tax sales while retaining your home and all other personal items.
- Allows peace of mind and the ability to get a fresh start!
Contact Our Experienced Bankruptcy Lawyers for a Free Consultation
The reasons why people file for bankruptcy could fill a book. Everyone’s situation is unique. Our Bethlehem bankruptcy attorneys at Young, Marr & Associates will carefully review your situation and help you understand the benefits of filing. Call our law office at (215) 701-6519 to discuss your next steps.