When you’ve gotten in over your head with credit cards or medical bills are piling up, you may think going bankrupt is your only way out. According to the U.S. Court System Administration Office, there were 936,795 bankruptcy filings in 2014, the majority of which were individuals claiming Chapter 7. While going this route allows you to wipe the slate clean, it also has a devastating impact on your credit. Bankruptcy is meant to be a last-resort option but there are certain situations when filing may be your best bet.
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You’re Being Sued by Debt Collectors
When you fail to make payments on a debt there’s a good chance that it will get turned over to a collection agency at some point. If the debt collector’s phone calls and letters go unanswered they may decide to file a lawsuit to try and force you to pay up. Fighting a debt collection lawsuit can be difficult and if you lose, you may end up owing even more in court costs and attorneys’ fees.
Filing a bankruptcy petition offers you some legal protection against debt collectors. Once the petition is filed, the bankruptcy court issues an automatic stay against your creditors. This means that until your bankruptcy case is either discharged or dismissed, you can’t be subjected to any additional collection actions, including a lawsuit.
Your Wages Are Being Garnished
When a debt collector winds a lawsuit against you, they still have to take additional steps to get whatever is owed. Depending on which state you live in, they may decide to freeze your bank account or garnish your wages. If a creditor obtains a court order for a wage garnishment, your employer is required by law to hold back a certain amount of money from your check each pay period until the debt is paid in full.
If your wages are being garnished, you can still be protected by the automatic stay if you file bankruptcy. The stay halts the garnishment, which can provide some financial relief if a significant amount of your pay was being withheld. Just keep in mind that the automatic stay doesn’t apply to garnishments for domestic support obligations, such as child support or alimony.
You Can’t Pay Your Bills
A job layoff or an unexpected illness can spell financial disaster if you’re not prepared. If you find yourself turning to credit cards just to cover everyday bills you may find yourself buried in debt. Even if you reach a point where you’re able to cover your basic living expenses without relying on the cards, keeping up with the minimum payments on your debts may prove to be too much of a struggle.
Racking up debt because of poor spending habits usually isn’t enough of a reason to file. If, however, your income has taken a serious hit due to circumstances beyond your control you may be a prime candidate for bankruptcy protection. Chapter 7 is in fact specifically designed for people whose income isn’t sufficient to carry their debt load.
You’re in Danger of Losing Your Home
While the housing market has seen a decline in the number of foreclosures, there are still plenty of homeowners out there who are struggling to keep up with their payments. If your financial situation has reached the point where foreclosure is a possibility, filing bankruptcy can help you get caught up on your payments and keep your home.
In a Chapter 13 filing, you’re able to keep all of your assets and create a plan for repaying delinquent debts. After a period of either three or five years, depending on your income, your case is discharged. As long as you’ve paid the outstanding balance on your mortgage and you continue making your regular payments going forward, you can stave off a foreclosure proceeding. If you owe a second mortgage but you’re underwater on the home, it’s also possible to have this debt eliminated entirely.
Filing bankruptcy can be a life-changing decision and it’s not one that should be made lightly. In many cases, digging your way out of debt simply requires some budgeting, patience and hard work. If your finances are spiraling out of control, it’s important to weigh the pros and cons of bankruptcy before you file to make sure it’s the best choice.
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