From Lesley Hoenig, an attorney in Michigan who handles bankruptcies:
Bankruptcy is, of course, something that most people do not want to do if they can help it. But sometimes, you are so deep in the hole, or maybe you ran a business that failed, and you are saddled with debt because of it, that the best way out is to file bankruptcy.
So, what do you need to look at to determine whether bankruptcy is your best option? A variety of factors:
1. How much property do you own? Not just real estate, but personal property as well. You have a certain amount of exemptions that can be claimed to protect your real and personal property, depending on the state you live in, so you need to consider if you have any equity that is not exempt before filing bankruptcy (which I recommend consulting with an attorney about this).
2. What has your income been in the past six months? You will also have to consider your spouse’s income and/or live in significant other’s income as contributions to the household, whether they are filing or not (You can only file jointly with a spouse). If you are below the state’s median income, you should be okay to file a chapter 7. If you are above the state median for your household size, other factors will have to be looked at to determine whether you would qualify for a chapter 7, or you would have to file a chapter 13 (if you were to file a bankruptcy at all). A Chapter 13 requires a payment plan of 3-5 years, which can be much harder to succeed with than a chapter 7 bankruptcy.
3. How much debt do you have? Are you getting sued? Do you anticipate having the ability to pay any of your debt? If you only have a couple thousand in debt, there really is no advantage to filing bankruptcy. If most of your debt is student loans, taxes, or child support, bankruptcy will not help you.
4. While you probably thought paying family members back was a good idea because you want them to not be hung out to dry, this is actually something that can cause problems if you do file bankruptcy. Trustees can look back an entire year to see what you’ve paid family members. If you paid a substantial amount to a family member, the trustee can go after that family member to get the money back and disburse to creditors. If you have paid them money, then you need to consider if now is the best time to file. Some times timing is not an option if you are risking a law suit or garnishment, but if you can help it, do not pay family members money before filing. It will cause more problems than it will solve.
5. Do not transfer property out of your name for no value prior to filing. The look back period for property is at least 2 years (varies based on state). While people will foolishly believe that transferring their house (for example) to their spouse or child will solve problems, it again will create more problems than it solves. It could cause your mortgage to be accelerated, the trustee could go after the house to get it back and sell it, etc.
6. If you are facing foreclosure, chapter 7 will only temporarily stop the foreclosure sale. The lender can get a lift of the automatic stay (what protects you from collection actions) after you file to proceed with foreclosure. If you want to keep your house, you will have to continue to try to modify your mortgage in a chapter 7 setting. A chapter 13, on the other hand, enables you to catch up on your mortgage. However, this is often very difficult for the average person to afford depending on why they are behind on the mortgage to begin with.
The proposed “cram down” legislation that was rejected by the Senate a couple months ago, is looking to be resurrected by Senator Durbin of Illinois. What this legislation would do is allow for a residential mortgage, in a chapter 13 case, to be “crammed down” or in other words, the principal would be reduced to the fair market value of the house.
Presently, this cannot be done for primary residences in Chapter 13. If this was an available option, it would likely result in more people being able to keep their homes.