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When considering whether and when to file for bankruptcy, keep in mind that the right to start over that bankruptcy provides is such a basic right that it is built into the constitution. Every American is entitled to a second chance.

Before filing for bankruptcy, consider the following:

  • Both the pros and cons of filing, including the list of debts that are not dischargeable in bankruptcy and the possibility of keeping some assets that may help you get restarted.
  • Your alternatives. 
  • The timing. For instance, bankruptcy started at the right time can stop the electric company from turning off the electricity.

For more information, see:





If you decide to move forward, see: You've Decided To File For Bankruptcy. Now What?

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How Can Filing For Bankruptcy Help Me?

  • Filing for bankruptcy can relieve the financial and emotional stress associated with overwhelming debt. 
  • While not all debts are dischargeable in bankruptcy, the types of debts usually associated with a serious health condition are dischargeable. The types of debts that are eligible to be discharged include:
    • Unpaid hospital and doctor bills.
    • Credit cards.
    • Unsecured loans (loans not secured by collateral such as a house or personal property).
    • Store accounts.
  • Once you file for bankruptcy, creditors are legally barred from taking further action to collect the money you owe them.  This includes phone calls and letters, the seizure of your property or taking your wages (garnishment). At least for a short while, it also means there won't be a disconnection of a utility service, eviction or foreclosure on your mortgage.
  • When the court discharges (completes) your bankruptcy, you will either no longer be responsible for paying eligible debts that were included in your filing or you will have a scheduled time over which to pay them.

When Might I Consider Filing For Bankruptcy?

It is preferable to only consider bankruptcy as a last resort. Explore all your other options because of the following reasons:

  • Bankruptcy will affect your credit rating. Bankruptcies stay on your record for ten years. As you are aware, credit is particularly important after a diagnosis. 
  • Bankruptcy will affect your automobile and homeowners' insurance premiums -- perhaps substantially.
  • Bankruptcy may hurt your chances to get a new job, or even cause you to be fired from a current one.

To learn about alternatives to bankruptcy, see Dealing With A Financial Crunch.

It is not advisable to file bankruptcy just to get collection agencies off your back. There may be better ways to deal with them. See How To Deal With Creditors.

Consider filing bankruptcy:

  • In emergency situations, such as a pending eviction from your home or the cut-off of your electrical power in the middle of a Florida summer. Filing for bankruptcy will delay these actions.
  • If there doesn't seem to be a way out of your financial crunch except by using assets that could be protected in bankruptcy. For example, retirement accounts are largely protected in bankruptcy.
  • If you want to save your home. 
    • You are allowed to keep a limited amount of home equity in most states. If your house is worth less than the mortgage plus your home-equity exemption, you can file for Chapter 7 bankruptcy, wipe out your consumer debts and still keep your home, provided that your mortgage payments are up to date.
    • If you are behind on mortgage payments but have a new job, consider a Chapter 13 workout.  There will likely be a three to five year plan for paying your debts, including what you owe for past payments.
  • Elizabeth Warren, the noted economist, recommends: "If you're out of work, try not to go bankrupt until you have  new job and see what's ahead of you."

What Are Some Of The Drawbacks Of Bankruptcy?

  • Not all debts are dischargeable in bankruptcy. See below.
  • Bankruptcy will stay on your credit report for ten years. During this time, it may be difficult to obtain credit that you might need for medical or other emergencies or, even, to live off of. Bankruptcy may even count against you if you're applying for a new job.
  • Chapter 7 bankruptcies can force you to part with possessions to which you may be emotionally attached, such as antiques, collections, or other family heirlooms.
  • Even more devastating for some people, bankruptcy could affect you emotionally. Some people who file bankruptcy may feel that Bankruptcy is the ultimate personal failure. In today's materialistic society (where self-worth is often measured by wealth) others may in fact think this as well. The emotional difficulty with bankruptcy can be lessened by seeking professional help or speaking with a Support Group.
  • There could be social stigma related to filing for bankruptcy. (Generally accepted wisdom is that real or perceived social stigma should not discourage you from filing bankruptcy.)

What Types Of Debt Are Not Dischargeable Under Bankruptcy?

Debts that are not dischargeable under bankruptcy include:

  • Income taxes less than three years past due. For more about wiping out your tax debt with bankruptcy, see Paying the Piper: When You Owe Money To The IRS.
  • Coop and condominium association dues.
  • Student loans. Student loans that became due more than seven years previous to filing for bankruptcy used to be dischargeable. This is no longer the case. The only way to discharge a student loan now is to prove that you will suffer an undue hardship if you continue to have this debt. This usually involves showing the court that if you make payments on the loan you will have a standard of living below the poverty line.
  • Alimony.
  • Child support.
  • Court judgments due to drunk driving or fraud.
  • Anything not listed in the petition for bankruptcy.
  • Money on goods purchased with a secured loan.
  • Debts for luxury goods which total $1,000 or more which were incurred within 60 days of filing.
  • Cash advances under open-ended credit of more than $1,000 obtained within 60 days of petition.
  • Debts incurred fraudulently, such as lying on a credit application or writing bad tests.
  • Debts resulting from the willful or malicious injury to other people or their property.
  • Debts that you decide not to include in bankruptcy.
  • Debts that you incur after filing for bankruptcy.

What Should I Do Before Filing for Bankruptcy?

  • Seek Credit Counseling: Credit counselors might be able to negotiate with your creditors and devise a repayment plan with which you can live. Use an agency that is on the U.S. Trustee approved list so that if you do file for Chapter 7 bankruptcy, you will have completed the first step. See Chapter 7 Bankruptcy, Negotiating with Creditors and Using Credit Counselor Services.
  • Consider New Uses of Assets: Have you considered debt consolidation using equity in your home? Do you have any life insurance, even term life? Do you have retirement plan assets? If the answer to any of these is yes, you might have access to funds that you didn't know about. See New Uses of Assets: Getting Cash From A Life Insurance Policy, New Uses of Assets: Getting Money Out Of Your Retirement Plan, and New Uses of Assets: Using Your Home to Get Cash.
  • Speak With An Attorney: Speak with an attorney to see what other options you might have. An attorney can help you make out-of-court settlements with your creditors.
  • Consider Doing Nothing: If you have little or no income or property, or if your only income is due to a disability (from a disability income policy or Social Security Disability Income) you might be "judgment proof." Basically, this means that you have nothing that creditors could take if they were to go to court. If you're judgment-proof, it might be best to simply do nothing. Except for very unusual situations, you can't be thrown in jail for not paying your debts.

If I Do Decide To File Bankruptcy, When Should I Do It?

Unless you're facing an emergency or a cutoff of an essential service, don't rush into bankruptcy.

If you're expecting a big medical bill or some other big bill, incur it BEFORE you file for bankruptcy. Only debts that exist before you file can be included. As long as the bill is not for a luxury, it will be included in your dischargeable debts.

Before you file, consider settling the debts of any creditors you'll need additional services from, such as your doctor. However, if you don't do this at least 90 days before filing your bankruptcy, the Trustee could treat the payment as a "preference." A Trustee can get the money back from your creditor to pay out among all your creditors as the court decrees. (If the creditor is an "insider" such as a family member, the trustee can recapture payments made to insiders for up to a year prior to the filing date.) Once you've filed bankruptcy, you'll have no control over who gets paid what and in what order.

Before filing for bankruptcy, try to keep a credit card or two free of debt. If there's no balance on your account when you file, the credit card company won't be contacted. Since the company won't be aware of the bankruptcy or, if it does become aware of it, won't be involved, it may not close the account.

Can't I Just Transfer My Property To Someone Else Before I File For Bankruptcy?

NO! Property that you transfer can get pulled back into what's called your "bankruptcy estate." In addition, such actions might in themselves cause your bankruptcy to be disqualified and you to be prosecuted criminally for fraud.

Under the federal law, the look back period to determine whether you transferred any property for less than fair value is one year prior to filing bankruptcy. The Bankruptcy code lets a bankruptcy trustee use state statutes in this circumstance which could include a longer look back period. For instance, in Pennsylvania the look back period is four years.