Is bankruptcy right for you?

Photo: morguefile.com

Q. I’ve had a terrible time keeping up with my bills, including medical debt and student loans. How do I know if bankruptcy is a good idea?
— Unsure

A. Bankruptcy is a big step, and we’re glad to see you’re not just jumping in.

There are several important issues to consider in deciding whether a bankruptcy filing is your best option for dealing with your outstanding debts, said Ilissa Churgin Hook, a bankruptcy attorney and member of Hook & Fatovich in Wayne.

The first thing to note is that, generally speaking, student loan debt is not dischargeable under the bankruptcy code, Hook said.

“In order to fit within the narrow exception to this rule, the debtor — the person filing for bankruptcy protection — must demonstrate undue hardship to the court,” Hook said. “This is a very tough standard which a court considers in view of the specific circumstances of each case.”

Hook said it’s difficult to demonstrate undue hardship unless you are physically unable to work and your situation isn’t likely to improve in the future.

Therefore, she said, if a large percentage of your unsecured debt is comprised of student loan obligations, a bankruptcy filing may not give you the relief you’re seeking.

If, however, your debts consist mostly of unpaid credit card and medical bills, a bankruptcy filing may be a good option for you, Hook said.

Remember you can only receive a Chapter 7 discharge — pursuant to which the credit card debt and medical bills would be discharged or “wiped out” — once every eight years, Hook said.

One factor to consider is the timing of a potential bankruptcy filing.

She said you should consider whether you require further medical treatment in the foreseeable future.

“A bankruptcy petition is a `snap shot’ of your assets and liabilities on the date that you file the petition,” she said. “Therefore, if you file a bankruptcy petition on Jan. 1, 2017 and then have a medical procedure on Jan. 10, 2017, any costs associated with the later procedure cannot be discharged in your bankruptcy case.”

Hook said most consumers/individuals seek relief either under Chapter 7 or Chapter 13 of the bankruptcy code.

Generally speaking, in a Chapter 7 case, a debtor seeks a discharge from his/her debts in exchange for exposing his/her assets to an examination by a third party trustee, who acts as a fiduciary for creditors, Hook said.

“One of the trustee’s obligations is to look for assets that have equity — after taking into account the costs of sale, any liens against the asset, and any relevant bankruptcy exemptions — that can be liquidated to pay creditors,” Hook said. “Therefore, you will need to evaluate your assets to determine if they will be `exposed,’ meaning subject to seizure and sale by a trustee.”

Then there’s a Chapter 13 filing, which is an option available to an individual or a married couple with regular income seeking to reorganize his/their debts and retain assets, Hook said.

She said a Chapter 13 case normally lasts three to five years and involves a payment plan which allows a debtor to repay his/her debts over time. The length of the Chapter 13 Plan depends on your income and ability to make monthly payments.

“Notably, additional interest on unsecured debts — i.e. credit cards and medical bills — does not accrue during the life of the Chapter 13 Plan,” she said. “Depending on your income and expenses, you may be able to pay back your debts in a court-approved payment plan.”

However, as Hook said before, student loans are not generally dischargeable, even under Chapter 13.

Another issue to consider, and one that’s reviewed by a bankruptcy trustee (and possibly by your creditors as well) is whether your potential bankruptcy filing is a good faith filing, Hook said.

“If you used your credit cards to purchase expensive luxury items recently, or if you knowingly gave inaccurate financial information in order to obtain credit, some or all of your debts may not be discharged if a trustee and/or creditors challenge the validity of same,” Hook said.

Consider consulting with an experienced bankruptcy attorney to examine all the facts of your specific situation.

Email your questions to moc.p1568931038leHye1568931038noMJN1568931038@ksA1568931038.

This post was first published in November 2016.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.