Bankruptcy May Not Be Your Best Option
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Bankruptcy May Not Be Your Best Option
Understanding the Complexities of Filing for Bankruptcy
Disclaimer: This article is for informational purposes only and is not intended as legal advice. Please consult an attorney licensed in your state for guidance on your specific situation.
Many people think of bankruptcy as a simple way to eliminate debt, akin to a "get out of jail free" card from Monopoly. Although it's widely known that bankruptcy can impact your credit for 7 to 10 years, fewer people realize that filing doesn't necessarily mean you'll be off the hook for your debts. Even with a Chapter 7 bankruptcy, you might still need to repay some of what you owe.
When You Might Still Owe After Filing
Here are some scenarios where bankruptcy might leave you with both its negative impacts and a continued obligation to pay:
1. Above-Average Income:
If your income exceeds the state average, you might be required to file for Chapter 13 bankruptcy. In this arrangement, you must allocate all disposable income to a court-appointed trustee who distributes payments to your creditors. It's important to note that "disposable income" is determined based on national and county statistics on necessary expenses, not your actual expenditures. For instance, paying for costly car expenses might not be recognized. There have been instances where judges ordered families to cut expenses like private school tuition to free up more money for debt repayment. Here are some Illinois median income figures:
- 1-person families: $41,650
- 2-person families: $52,891
- 3-person families: $62,176
- 4-person families: $72,368
2. Owning Significant Assets:
If you own substantial assets like a home or car, you might be required to sell them to generate funds for creditors. Other investments may also need liquidation. Luckily, there are some consumer protections in place. In Illinois, for example, residents are entitled to certain exemptions: $7,500 for their home, $1,200 for their vehicle, and $2,000 for other items (known as a wildcard exemption). These amounts double if you're married and the property is jointly owned.
Example: Suppose you own a house worth $250,000 with an outstanding mortgage of $200,000, and you file for Chapter 7 bankruptcy. You'd need to sell your home to pay off the mortgage, collect your $15,000 real estate exemption, and then pay the remaining $35,000 to other creditors.
If the house were only worth $215,000, you wouldn’t need to sell, as there would be no significant proceeds after settling the mortgage and the exemption.
3. Fraudulent Intentions:
Creditors who can prove you never intended to repay may prevent you from having those debts discharged.
Is Bankruptcy Right for You?
If you fall into any of the above categories, consider your situation carefully. Bankruptcy may not be suitable if:
- You lack substantial equity in property.
- You don't have significant investments like stocks or additional real estate.
- You're unwilling to sell assets or sacrifice five years of disposable income in a Chapter 13 plan.
Explore all possible alternatives to determine the best financial path forward.
You can find the original non-AI version of this article here: Bankruptcy May Not Be Your Best Option.
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