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When to File for Personal Bankruptcy and Why

“Bankruptcy” — seems like a big and scary word, doesn’t it? A lot of people have negative connotations about the whole concept of filing for bankruptcy. But what a lot of people don’t know is that bankruptcy can offer a huge relief from financial difficulties and give a debtor a fresh financial start. No matter how scary bankruptcy sounds, sometimes, it’s the best choice one can make to start over and manage their finances better.

In the same way, bankruptcy does not come without its pitfalls and consequences. Filing for bankruptcy is a trade-off that people need to be willing to make — and they need to be sure of it too. So before you should even think about filing for bankruptcy, you first need to know why it’s needed and when’s the best time to file. 

When to File for Personal Bankruptcy 

Everyone’s financial situation differs. Some may be urgent and require immediate relief, while others may have some other alternatives. Despite there being no perfect time set in stone to file for bankruptcy, here are some indications that it’s probably time to declare it:

  • Your debts are piling up and your income is not enough to cover your debts and liabilities 
  • You only have a few assets that you can liquidate to pay off your creditors
  • Interest rates are causing your debt to pile up
  • Upon computation, you realize that it will take you more than 5 years to wipe out your debts.
  • You’ve already tried negotiating with your creditors but to no avail. 
  • Your creditors are threatening to initiate legal action, foreclose your property, evict you from the premises, or disconnect your utilities, etc. 

Filing for bankruptcy is a personal decision that requires a lot of consideration. There is no ideal time to file for bankruptcy, but it’s important that a person first educates himself or herself about bankruptcy and consider the alternatives. Before you make the decision to file for bankruptcy, make sure you first assess your unique financial situation, learn your options, and speak with an experienced bankruptcy attorney

Why Should You File for Bankruptcy? 

The most obvious reason people file for bankruptcy is for debt relief. It gives them an opportunity to have their debts discharged or obtain a longer time to settle their obligations. After bankruptcy, you get a clean, financial slate and an opportunity to start over. 

Aside from debt relief, some people also file for bankruptcy to prevent creditors from suing or initiating legal action against them. When a debtor files for bankruptcy, they are afforded the benefits of an automatic stay, which prohibits creditors from initiating collection lawsuits, foreclosing the debtor’s assets, or eviction and disconnection actions. 

What Type of Bankruptcy Case Should You File? 

Educating yourself about the different types of personal bankruptcy cases you can file can help you make a better decision about when it’s time to declare bankruptcy. You can file under two statutes: Chapter 7 or Chapter 13. 

In a Chapter 7 bankruptcy, your Chapter 7 trustee will collect and evaluate all your financial records. They will take charge of collecting your assets and liquidating them to pay off your creditors. This form of bankruptcy offers quick and immediate relief by discharging all or most of their debts. A Chapter 7 bankruptcy is for you if your income falls below the State threshold and you are seeking immediate relief from your debt obligations. 

Your other option is to file under Chapter 13. Here, you get to keep your assets as there is no liquidation involved. Instead, your Chapter 13 trustee will create a payment plan that’s tailored to your unique financial situation. The payment plan binds you to settle your debts in arrears in a period of 3 to 5 years. This type of bankruptcy is more suited for those who have assets they want to protect and whose income is sufficient to make monthly debt payments. Although it does not discharge you from paying your debts, it gives you more time to make payments and binds your creditors to respect the payment plan ordered by the court. 

Consult a Bankruptcy Lawyer 

Which type of bankruptcy case you should pursue and when you should file would depend on your unique goals and financial situations. There are no rules set in stone that will tell you if it’s time to file for bankruptcy or there are other alternatives or routes you can take to relieve yourself from financial difficulties. 

It’s important to engage the services of an experienced bankruptcy lawyer to help you make the wisest financial decisions and increase your chances of getting the most favorable form of financial relief.

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Jennifer
Scott

Partner - Domestic Relations

Boulder