10 Signs You Might Benefit from a Consumer Bankruptcy

Dealing with unpaid debts can quickly start to feel like a full-time job. If you are falling behind on your payments, or feeling stress over creditor calls, you might benefit from a consumer bankruptcy. Knowing what this tool is and how it can help you manage your debt starts with recognizing the signs of financial distress.

Who Benefits from a Consumer Bankruptcy

In Connecticut, consumer bankruptcy is a tool individuals and married couples can use to get ahead of their unpaid debts. You can file a petition for a consumer bankruptcy individually or “jointly”, that is, as a couple. The category of consumer bankruptcy includes both:

• Chapter 7 Bankruptcy – Where the bankruptcy trustee liquidates your non-exempt assets to pay off your debts and then discharges any remaining dischargeable debts
• Chapter 13 Bankruptcy – Where you make payments over time toward your outstanding debts according to a trustee-approved repayment plan, discharging whatever is left at the end.

Whether you might benefit from a consumer bankruptcy depends on how much you make, how much debt you have, and what kind of debts you owe. Non-dischargeable debts, like child support or alimony, most student loans, or recent tax debts, survive the bankruptcy process, but other debts, like credit card balances and medical debt, can be discharged entirely.

How to Know If I Should File for Bankruptcy

A wide variety of individuals and families might benefit from a consumer bankruptcy. Filing a bankruptcy petition can stop debt collector calls on the spot, and bring much-needed relief to your family budget. Here are 10 signs you might benefit from a consumer bankruptcy:

Creditor Calls Won’t Stop

When you are being harassed by creditors day and night, and can’t escape their calls, letters, and threats, it is time to talk to a bankruptcy attorney. Filing a bankruptcy petition triggers an automatic stay that forces creditors to stop contacting you while the bankruptcy is pending. At the completion of your case the discharge injunction enters, which permanently prohibits creditors from taking any action to collect a debt as your personal liability. The peace of mind you get knowing your debts are being handled is a huge benefit that comes from consumer bankruptcy, even before your petition is filed. The goal is to provide you with a “fresh start”.

Facing Foreclosure or Eviction

Most people put a top priority on making their rent or mortgage payments since they need somewhere to live. But if you start to fall behind on your housing payments, penalties, late fees, and interest can add up quickly. A consumer bankruptcy won’t erase your mortgage (secured debts are not dischargeable), but it can stop foreclosure proceedings against you, buying you more time to catch up. You can also include your mortgage or rent obligations in your Chapter 13 repayment plan, prioritizing the debt over others that can be discharged at the end of the repayment period. In a chapter 13 mortgage arrearages can be paid over up to 60 months at zero percent interest.

Debt Balances Outweigh Your Assets

If your combined debts are worth more than your vehicle, bank account, and other high-value items combined, it is a good sign you might benefit from a consumer bankruptcy. Many Connecticut bankruptcies are called “no asset” bankruptcies. This means that all or most of your assets are covered by federal or Connecticut bankruptcy exemptions. While you still need to go through the bankruptcy process, you may be able to get the benefit of a consumer bankruptcy without putting your property at risk.

Debt-Collection Lawsuits

Being served with a debt collection complaint can be embarrassing and stressful. It is also a good sign that you might benefit from a consumer bankruptcy. The automatic stay puts collections lawsuits on pause, preventing creditors from getting judgments against you that will hurt your credit rating and make it harder for you to manage your full financial picture. Your bankruptcy petition will stay the court action and result in the discharge of the debt that the creditors are trying to collect, making it unnecessary for you to show up in court and defend your case.

Wage Garnishments Are Eating Into Your Income

If you already have a collection judgment against you, or you owe taxes, you could find yourself bringing in a lot less money than you earn. Wage garnishments and tax liens send your wages directly from your employer to your creditors (including the IRS), limiting your ability to control your own financial future. However, filing for bankruptcy will also automatically stay wage garnishments and bank executions , freeing up your income to pay other debts, and such debts can be discharged like other unsecured or paid with other unsecured creditors through a Chapter 13 repayment plan.

Using Credit to Pay for Essentials

Another sign that you may need to file for bankruptcy is if you regularly find yourself using credit cards or payday loans to pay your basic living expenses like food, shelter, and transportation. Often, the interest and penalties on these loans can dig you even deeper into debt. Even if you are able to get a new job and increase your income, you may be paying off those payments for years to come. But a bankruptcy can help you get a fresh start.

Contemplating Debt Consolidation

There are good reasons to consolidate your debts, such as reducing interest rates or streamlining your payments. But if you don’t have enough money to pay off all your debts, putting them into one consolidated debt won’t solve the problem. The benefit to bankruptcy, compared with debt consolidation, is that it treats all medical, credit card and unsecured debts as a single class, unsecured debt, which can be discharged all at once. In contrast, a debt consolidation company may charge you a large up-front payment to negotiate payoffs with each individual creditor, a process that may take years and is rarely successful in resolving all or even most of the debt.

Considering Taking Out New Debt to Pay Old Debt

Similarly, many Connecticut residents trying to avoid bankruptcy may “juggle” credit cards or take out a home equity loan to pay off other debts. But this can create new problems. Home equity loans, especially, can convert dischargeable debt (like medical bills) into non-dischargeable debt (similar to a mortgage). If you fall behind on the HELOC payments, you could put your house at risk. Before refinancing, talk to a bankruptcy lawyer.

Withdrawing Retirement Assets to Pay Debts

If you find yourself facing unexpected debts, like hospital bills or vehicle repair costs after an accident or costs related to a home repair after a natural disaster, you may be tempted to withdraw funds from your 40k or IRA to pay off your debt. This is a mistake, one of the worst things you can do, financially. Taxes and penalties for early withdrawal from pre-tax accounts mean you will need to take out far more than the balance of your debts. Plus, retirement assets are exempt from bankruptcy liquidation. By withdrawing retirement assets rather than filing for bankruptcy, you just reduce the size of your “nest egg” that would grow over the years if left alone.

Financial Stress Putting a Strain on Relationships

One sign you might benefit from consumer bankruptcy that is often overlooked is the relational strain financial stress puts on couples and families. If you and your spouse are constantly fighting over money, it may be because your debt is out of control. Talking to a bankruptcy attorney could do more than just reduce your debt. It could even save your marriage.

At Lawrence & Jurkiewicz, we focus our practice on helping people. We want you to get the benefit of a consumer bankruptcy, reducing your debt and giving you a better future. We will meet with you to review your financial circumstances and help you decide whether to file for a Chapter 7 or Chapter 13 bankruptcy. Please call 860-264-1551 or contact us for a free consultation.