What is Bankruptcy?

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts.

Under a Chapter 7 bankruptcy the debtor’s non-exempt assets are liquidated to pay off the debt. Chapter 7 is the most common form of bankruptcy in the United States. For more information on exemptions visit our Bankruptcy Frequently Asked Questions page.

A Chapter 13 bankruptcy enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.

Signs it is Time to File Bankruptcy

It may seem like knowing when you need to file bankruptcy would be easy, but for many people it is not.  And in some cases, people are right in the gray area between needing to file bankruptcy versus alternatives such as debt settlement.  We help people determine if bankruptcy is appropriate for them, or if an alternative solution is better.  So here are some general signs and symptoms that likely point to bankruptcy as a good option for you.

Loss of Job, Employment or Income

While the loss of a job, alone, may not require a bankruptcy filing, it can lead to a situation where bankruptcy is inevitable.  You will often hear financial advisors say that you should have 6 months of savings in case of job loss, to allow you time to find new income.  But what if you don’t have that much savings?  What if it takes longer than 6 months to find a job?

Without income for an extended period of time, many people will turn to credit cards, loans from relatives, payday loans, pawn shops, or other means of making ends meet.  Unfortunately, this will sometimes dig a deeper hole.  Now, on top of no income, you may find yourself struggling to keep up with minimum payments on all the new debt.  And even if you do find a job, it may pay less or not enough to realistically get out from under all the debt.

It is very important to understand the timing of a bankruptcy filing at this point.  In order to qualify for a Chapter 7 bankruptcy, your income cannot exceed certain limits.  If your income is above the Arizona median income for a family of your size, or you can’t pass the means test, you may not be able to file a Chapter 7 bankruptcy.  This means you may not be able to discharge all of your debts, even if you file bankruptcy.  Many people make the critical mistake of waiting till they find new employment to file bankruptcy.  But their income may be too high then.

So the lesson is this: if you have gone without income for an extended period of time and incurred debt, it may be better to file the bankruptcy petition before finding new employment.  That way, when you do get a new job or source of income, you will have eliminated most, if not all of your debt, and can look forward to a fresh start.

The Credit Card Hamster Wheel

Juggling numerous credit cards, handling balance transfers and always trying to stay one step ahead of the minimum payments can be a daunting task.  Unfortunately, credit card companies will extend credit far beyond the means of most borrowers to repay it.  So, just because you are approved for another card, doesn’t mean you’ll have a realistic chance of paying it back.

And at 25% interest, paying it back could literally take decades.  Check out the estimated time it will take to repay printed on your credit card statement – it’s shocking.  As long as you keep making the minimum payment (running on the hamster wheel), the credit card companies are happy.  It’s all gravy for them.  But most of the money you are paying is going to interest and won’t get you debt relief.  Even paying a little more than the minimum payment may not do much.  And it could prevent you from using that money to pay for other family expenses or saving for retirement.

So here’s the lesson: Don’t get caught in the hamster wheel.  Credit card debt is usually dischargeable in bankruptcy and can provide you a fresh start.  The longer you keep running on the wheel, the less time and money you can put toward your future.

Struggling with a Small Business?

Funding and operating a small business can be draining on the finances.  And the closure rate of many small businesses has increased in recent years.  If you’ve tapped credit cards, HELOC’s & equity lines to keep your business afloat, it may be time to think about bankruptcy.  For many people, a small business can dig a hole that can seem impossible to get out of.  Many types of business debts are dischargeable in bankruptcy.

Medical Bills and Health Issues

The soaring cost of medical care is one of the leading causes of bankruptcy.  If you don’t have adequate insurance coverage or have significant health issues, medical bills can pile up quickly.  Most medical bills are dischargeable in bankruptcy.  We will also take a look at your future medical needs and determine the best timing of a bankruptcy filing to maximize the benefit to you.

Are you Expecting an Inheritance or Increase in Income?

Waiting too long to file bankruptcy can be a huge mistake.  There are many very specific laws about what is and is not included in your bankruptcy filing.  For example, if you receive an inheritance within 180 days AFTER your bankruptcy, you have to report it to the bankruptcy trustee and it can be used to pay your creditors.  So if you anticipate an inheritance, you should consult with a bankruptcy attorney ASAP.

Likewise, if you anticipate an increase in income, you should talk to a bankruptcy attorney right away.  Many people hang on too long, hoping that an increase in income will cure their debt problems.  All too often, it doesn’t.  And they now find themselves unable to qualify for a Chapter 7 bankruptcy, which means they may not be able to discharge all of their debt.

Bankruptcy Planning by a Phoenix Bankruptcy Lawyer

We understand the planning and timing of a bankruptcy filing.  We offer a free consultation to help you evaluate your options and determine the best course of action.  If you can identify with any of the things discussed on this page, please contact our Phoenix, Arizona office for a free confidential consultation with a bankruptcy attorney.