7 Reasons Why You Should Not File for Bankruptcy

I meet with a lot of people who believe that bankruptcy is going to be their best option. And truthfully, for most of the people I meet with bankruptcy is not only the best option but something they should have done a long time ago. However, when I meet with families, there are those that should not file for bankruptcy for one reason or another. I have put together a list of seven (7) reasons why you should not file for bankruptcy. #1 You Can Afford to Pay Your Debts This one seems simple, and is truly rare among most people I meet with, but every now and again someone comes in and simply wants to walk away from it all. The debt is relatively minimal compared to income. A good way to determine if you fall into this category is to take your monthly income, minus all of your monthly expenses, including your credit card payments, and if there is a significant amount of money left over, you are likely going to be better off in the long term just making arrangements to pay the debt. That being said, I have had clients come in who have very little debt. Very little debt in my world is something in the range of $10,000. However, for some clients his might as well be $10 million. They have no job or very limited income and no serious prospects for improving their income situation in the near future. I also see many seniors who are living on a very fixed income fall into this category. For some, even when the debt is relatively small, if the ability to pay is not there, bankruptcy can be a good option. #2 Your Debt is Mostly Tax Debt Not all debts are created equal. Certain debts, even in bankruptcy, are not discharged or eliminated through the bankruptcy process. Most taxes fall into this category. Certain taxes like payroll taxes a business owner owes will never go away. The typical income tax will not be eliminated in your bankruptcy unless it meets certain criteria. Specifically, it must be at least three years old and must not have been assessed to you at anytime in the last 240 days. If the majority of your debt is taxes and relatively recent, bankruptcy is likely not going to be a good option because you will not obtain the benefit of discharging those debts. However, if your debt is income tax, and it is at least three years old, you should meet with a bankruptcy attorney to see if it can be eliminated through bankruptcy filing. #3 Your Debt is Mostly Student Loan Debt The only thing more difficult to eliminate through bankruptcy other than taxes is student loan debt. Back in 2005 the Bankruptcy Code was amended to include a provision that made all debt obtained for educational purposes presumed to be non-dischargeable. You can overcome this by showing hardship, however the bar has been set very high. I witnessed a trial once where an attorney who had significant student loan debt sought to eliminate these debts through bankruptcy after an auto accident left her a quadriplegic. The court ruled that she could still work and only reduced her loans by half. If student loan debt is the main debt problem you have a better option than bankruptcy would be to seek out the many organizations that help with student loan borrowers going through financial hardship. #4 Filing Bankruptcy Will Hurt Your Credit Score It is pretty much common knowledge that filing for bankruptcy is going to damage your credit score. How much it will lower your score is hard to say; I have noticed that for those bankruptcy clients who have low scores when we file their case (550 or lower) that the bankruptcy doesn’t lower the score that much more – typically another 30-50 points. However, for those clients who have decent credit (700 or higher) they usually take a hit in the range of 100 – 150 points. I don’t know why this is or what the formula is for calculating this, but this is what I have observed in the hundreds of bankruptcy cases I have filed. While bankruptcy will absolutely lower your credit score, most of my clients are surprised to see that their score will actually increase within 12 months of their bankruptcy case being discharged. Most who look to file for bankruptcy are behind on their bills. When you fall behind on your credit card payments each month the credit card company lets the credit bureaus know that you are late. This lowers your score and continues to hit you month after month. The filing of a bankruptcy stops the bleeding. You are no long getting hit each month with a “late”. You will get hit with a bankruptcy on your credit report, but that is a one time thing; it is not re-reported each month. The further you get away from your filing date the better you will be.