Money Fix: Bankruptcy can be a financial safety net. When might filing be smart?
Richard Feinsilver, a bankruptcy attorney in Carle Place, says many Long Islanders were living on the financial edge well before the pandemic. Credit: Stephen Sachs
The economic fallout from the pandemic continues to put pressure on many who were already on shaky financial ground. Some may soon be faced with a tough decision — to file bankruptcy or not?
There’s no easy answer to that question. Weigh the pros and cons and find what works best for you.
The pros
“From my experience, an individual has to reach a personal breaking point to consider bankruptcy. In this environment, it will most likely be the ending of Pandemic Unemployment Assistance,” says Richard Feinsilver, a bankruptcy attorney in Carle Place.
He says many Long Islanders were living on the financial edge well before the pandemic. Not only don’t they have sufficient savings for a financial emergency, “they simply have too much month left at the end of their money.”
Bankruptcy can be a financial safety net. When might filing be smart? “When repaying your debt would cause an undue burden on your life. It’s different for everyone. Someone who is collecting Social Security of $1,000 per month might benefit from a bankruptcy when they have $10,000 in debt. But if you’re making $70,000 per year, you may not feel the same burden until you reach $20,000-$30,000,” says Patrick Best, author of "The Essential Bankruptcy Survival Guide."
If you're faced with significant financial distress and have exhausted other options to manage and reduce your debt, bankruptcy may be advised, says Leslie Tayne, a debt resolution attorney with the Tayne Law Group in Melville.
There are advantages. Filing stops collection efforts, which could include garnishment of wages, bank account levies, and foreclosure on a home or other property. “Filing for bankruptcy provides a clean slate and can reduce the stress associated with uncontrollable and unmanageable debt,” Tayne says.
Not a panacea
There is a lot to understand before filing. There are two types of filings, Chapter 13, where debts will not be repaid and Chapter 7 where some debts will be repaid. Understanding both filings will make for a better decision, explains John Davis, a financial education ambassador with ScoreSense, a provider of credit related information and services in Dallas.
If you file, you'll have to decide which type, Chapter 7 or 13. Under Chapter 7, you'll be required to allow a federal court trustee to supervise the sale of any assets that aren't exempt. Money from the sale goes toward paying your creditors. The balance of what you owe is eliminated after the bankruptcy is discharged. Chapter 13 bankruptcy works slightly differently, allowing you to keep your property in exchange for partially or completely repaying your debt.
“Chapter 13 bankruptcy is normally chosen by people who want to keep their nonexempt property intact or buy time against foreclosures or property seizures. Whether to file for Chapter 7 or Chapter 13 is not your decision alone. The courts impose a means test to determine whether you are eligible for Chapter 7,” says Baruch Silvermann, CEO of The Smart Investor, a free online academy for investors.
Filing bankruptcy is not a “get out of jail free card.” Filing includes attorney and court administration fees. You could be required to pay back 100% of the debts through Chapter 13, which takes three to five years and stays on your credit report for up to 10 years, (it’s seven years for Chapter 7.)
“You'll have issues with jobs that require a security clearance or licensing. Insurance rates could go up, you could be placed in high-risk categories, and pay higher fees and rates for loans and other financial products. Loans and credit cards will be challenging, if not impossible, to qualify for. You likely won't qualify for a mortgage,” Tayne says.
In most cases, student loans are not dischargeable, and neither are tax debts. If you are a co-signer, then the other borrower will be responsible for the debt if you have it discharged.
Bankruptcy can be a fresh start, but explore alternatives. Says Rohan Pavuluri, CEO of Upsolve, a Manhattan nonprofit that helps people file bankruptcy for free, “Debt settlement, debt consolidation, and nonprofit credit counseling are options. They don’t clear debt but may be a better option for people who believe they can repay their debts at lower principal amounts or interest rates.”
