For many individuals in debt, bankruptcy can be a tremendous help. Bankruptcy can discharge credit cards, give you time to pay off the IRS, and even reduce the amount you owe on your car. Essentially, bankruptcy restructures your finances and gives you a financial fresh start.
Sometimes bankruptcy is not a good idea. Sometimes bankruptcy can make a bad situation worse, and those times are not always clear to the untrained eye. Below are three situations when bankruptcy may not be the best option:
Bad Situation #1: filing bankruptcy when you don’t need it.
Bankruptcy is strong medicine. In some cases bankruptcy medicine is more than is required to solve a financial problem. Take, for instance, the case of Amy. Amy is a health, 24 year old grocery clerk who got into some trouble with credit cards. She only owes $4,000 in total debt, but her grocery clerk income is not enough to pay down her debt. Instead of filing bankruptcy, Amy should consider get a second job, a roommate to help with expenses, or other non-bankruptcy options.
Bad Situation #2: filing bankruptcy when you expect more debt.
Bankruptcy is generally not a good idea if you are facing a large debt in the future. The general rule is that a debt that is incurred after your bankruptcy filing date is not included in your bankruptcy case. For instance, if you file bankruptcy, then have a $10,000 medical procedure, your medical bills are not included in your bankruptcy discharge.
Bad Situation #3: filing bankruptcy when you are entitled to a large sum of money.
Income that you are entitled to receive in the form of a bonus or commission check is not income, it is an asset. In some cases this can help you (it may help you pass the bankruptcy means test), but in most cases it hurts, because protecting cash money with exemptions can be difficult.
Here’s another example: let’s say your rich aunt Bessie is terminally ill. You expect to receive a small inheritance from Bessie, so you file bankruptcy in April. Bessie dies in August, shortly after your bankruptcy is discharged and your case is closed. When the will is read you are shocked to discover that Bessie left you $200,000! Great news, right?
Unfortunately, the Bankruptcy Code requires that you inform the bankruptcy trustee of any inheritance within six months of the bankruptcy filing date. This date is measured by the day Bessie dies, not the date that you actually receive the money. The trustee will take your inheritance, pay your creditors, pay himself, and then give anything left back to you.
For many people struggling with debt, bankruptcy is the obvious answer. However, the choice to file bankruptcy should always be made after a careful examination of your finances by an experienced bankruptcy attorney. Your attorney can explain your options and help you arrive at the best course of action.