When Bankruptcy Is Not An Option

The purpose of a discharge is to “release an honest debtor from his financial burdens and to facilitate the debtor’s unencumbered `fresh start'”. In re Pelkowski, 990 F.2d 737, 744 (3d Cir.1993) (citing Kokoszka v. Belford, 417 U.S. 642, 645-46, 94 S.Ct. 2431, 2433-34, 41 L.Ed.2d 374 (1974)). The general purpose of a bankruptcy case is to fully disclose everything you own or have an interest in and surrender assets to the trustee that exceed the amount that can be protected under the laws of exemptions. Otherwise, if you’re not willing to surrender assets, you can also make a payment plan under Chapter 13 of the bankruptcy code.

Bankruptcy may not be an option when you have assets to lose and you are not willing to surrender those assets. You see, a Chapter 7 bankruptcy case is considered a liquidation bankruptcy where you cannot afford to make any payments toward your debts. If you have no assets, then you have nothing to lose and everything to gain from filing bankruptcy. But when you have too much equity in your home that you don’t want to leave, you may need another alternative to bankruptcy.

A key to success is to consult with at least two or three bankruptcy lawyers because I hear from clients that we’re not all the same. One would think that, but it’s simply not true. Not all bankruptcy lawyers are seasoned and you could end up losing assets if your lawyer is not well versed in the laws of exemptions and how to protect your assets or warn you if you’re at risk of losing assets. If you find yourself in a Chapter 7 case and at risk of losing assets, you do have the right to convert your case to a Chapter 13 and make a payment plan, if your budget allows. Unfortunately, once you’ve attended that Section 341(a) hearing called a “Meeting of Creditors,” most trustees will not allow a dismissal, which makes it hard to escape the trustee’s taking powers.

Another reason bankruptcy may not be right for you is when you make too much money and you would be repaying 100% of your debts. That’s when bankruptcy is optional and you should wiegh the pros and cons of all your options before choosing a payment plan under Chapter 13 of the Bankruptcy Code or a debt settlement plan. In Chapter 13, your debts are repaid without any interest, which makes it more affordable than a traditional repayment plan with most unsecured credit card debt. Another benefit of a Chapter 13 case is that not all creditors file claims to get paid. This means that the amount you owe today, may drop after filing for bankruptcy. A third benefit to a Chapter 13 bankruptcy is that there are not tax consequences for debts discharged in Chapter 13. Not one of these benefits are available outside of bankruptcy.

Finally, a fresh start in bankruptcy is for the “Honest, but unfortunate Debtor.” This means you cannot hide or give away all your belongings and expect results in bankruptcy. If you’re facing a fraud lawsuit, or there has been a judgment against you for fraud, you may not be eligible for bankruptcy. The only way to find out is to take a complimentary consultation with a bankruptcy lawyer that has experience in your local courts. The longer they have been in practice, the more knowledgeable they will be and the better your assets will be protected as you seek to eliminate debt from your budget. Remember, there is no shame in filing for bankruptcy protection in a pandemic.