By definition, bankruptcy is a way for people who have more debt than they can afford by giving them a fresh start. There are two types of bankruptcy, for individuals called chapter seven and chapter 13, which result in either liquidating assets to pay debts or creating a repayment plan.
While bankruptcy is an excellent solution for many Colorado residents who’ve accumulated too much debt, it’s not a one-size-fits-all solution. Continue reading to learn five reasons you shouldn’t file bankruptcy and what you could do instead.
1. You Can Pay Your Debt Each Month
If you can pay your debt each month without falling further behind, it’s best to do that instead of filing for bankruptcy. While there are many benefits to filing, there are also downsides. If you’re managing your debts, avoiding the downsides of bankruptcy is your best option.
If you’re looking for a way to decrease your debts quickly to keep up with them, there are many options. For example, some people may qualify for a consolidation loan or have the ability to borrow money from family. Either option can give you more time to get out of debt.
Taking on a seasonal second job during the busy summer months or holiday season could also be a good idea. You’ll need to contribute significant portions of your second income towards paying off any debts you’ve accrued for this to work.
2. There’s Too Little Debt To Be Worthwhile
Even filing bankruptcy costs money. You need to pay the costs of filing, plus hiring an attorney. You don’t want to file bankruptcy without the help of a dedicated, knowledgeable attorney because it could lead to financial disaster instead of being the “get out of debt free” card you were looking for.
If your debts are less than filing costs, bankruptcy won’t be worth your while. However, there is one exception to this rule.
If you’re behind on your car or house payments and are at risk of losing those assets, bankruptcy could help you avoid foreclosure or repossession. However, you may want to speak with an attorney to see if this is the right option. Alternative options may be available to you in these circumstances.
3. You Believe Bankruptcy Will Hurt Your Credit Score
If you believe bankruptcy will hurt your credit score, you’re far from alone. However, filing for bankruptcy alone doesn’t affect your credit score as much as you might think. This common misconception stems from the fact that many people who have filed for bankruptcy have poor credit scores, but there’s a different reason for that.
When most people decide that bankruptcy is their only option, they’re already way behind on their debts. These debts are usually reported to the credit bureau, which negatively impacts your credit score.
Filing for bankruptcy itself doesn’t lower your credit score as much as you might think. It’s the debts accumulated leading up to filing that lower the score. It’s essential to understand how this works before deciding to file for bankruptcy.
4. Accused of Intentionally Defrauding Your Creditors
Intentionally defrauding your creditors means you purposefully accumulated the debt with no intentions of paying it back. It could also mean getting rid of valuable assets, so they can’t be seized by your creditors, whether or not you’re filing bankruptcy.
If you’re accused of committing purposeful defrauding against your creditors, you may not be allowed to file for bankruptcy. There are state and federal laws governing the ability to file for bankruptcy, and breaking certain rules makes you exempt.
Of course, you could be wrongfully accused of defrauding your creditors. To avoid being accused of this serious crime, you should ensure the following:
- Don’t transfer any valuable assets for at least six months before filing for bankruptcy
- Avoid accumulating any excessive new debts if you plan to file in the coming months
- Don’t use other people’s names or social security numbers to open new accounts (this includes your children’s names and socials)
- Speak to your bankruptcy attorney before making any significant financial decisions during this time
If you follow these tips, most false accusations of defrauding can be avoided. However, creditors can attempt to accuse you whenever they’d like. But, the burden of proof lies on them, and avoiding the above can help negate the risk the courts will side with your creditors.
5. Recently Transferred Your Assets
Although this was briefly touched on in the defrauding section above, it deserves its own section. Recently transferring your assets when filing for bankruptcy can cause serious issues. Even if you didn’t do it maliciously, it could look bad.
There are some situations where you might genuinely want to transfer your assets for reasons unrelated to filing for bankruptcy. For example, perhaps you have an extra vehicle and wish to gift it to a relative or close friend in need. Maybe you have a vacation property and want to transfer it to one of your children, so they own a home of their own.
These are understandable and even admirable reasons to transfer assets. However, if you plan to transfer anything of significant value, be sure to do it at least six months before filing for bankruptcy.
You’ll also want to keep records on why, when, and how the assets were transferred. These records can help you beat defraud or similar charges, should this become an issue in your unique circumstances.
Bankruptcy Isn’t Always the Answer
While bankruptcy is an excellent solution for some people and situations, it isn’t always the answer. If your situation includes any of the above reasons to not file bankruptcy, now may be the time to reconsider this decision.