Making Bankruptcy Work for You

Many potential clients call us saying they need to file bankruptcy. But do they? Not always. There are many factors that must be considered before proceeding with a bankruptcy filing. It is not a decision to be made hastily or taken lightly.

Deciding whether or not to file bankruptcy—or even whether bankruptcy is your best option—can be a difficult decision. There is no easy formula for deciding when bankruptcy is the right choice. You should consider bankruptcy as an option if you are unable to pay your bills for an extended time and especially if:

● Creditors are threatening to repossess or foreclose on your home or other assets, especially if you are threatened with the loss of your family home or vehicle.

● You have been sued and a creditor has a judgment and is garnishing your wages or bank accounts or has had the sheriff levy a writ of execution.

● You have had a severe financial setback, such as a divorce, an uninsured illness or accident, the loss of your job, business failure, or other catastrophic financial loss.

● You are thinking of refinancing your home or dipping into your 401(k) or retirement savings to pay creditors.

● You can’t come up with and stick to a budget that will get you out of debt within five years--or your creditors won't accept your payment plan and are threatening to sue you and garnish your earnings.

In general, if you are facing garnishment, foreclosure, or repossession that is affecting your home, job, or family security, then bankruptcy may be the right option. But not always. Sometimes filing bankruptcy is a bad option, even if you are having financial difficulty. For example, if your home has substantial equity that is not fully exempt, a bankruptcy trustee might sell your home, in which case refinancing or trying to work out a plan with creditors outside of bankruptcy may be a better option. There are many alternatives to filing bankruptcy, including:

● Consolidating your debts to reduce your monthly payments and interest rates.

● Working out payments with creditors to lower or skip payments or settle debts to pay off balances for less than you owe.

● Seeking the help of a reputable credit counseling agency to help you negotiate with creditors reduce payments. (But watch out for scams!)

All of these options require that you create a realistic budget and stick to it! Consolidating credit card debts will do you no good if you go right out and charge up your credit cards again. Also, these options are likely to negatively impact your credit score, although if you're considering these options your credit rating may already be impacted. And settling debts for less than you owe can trigger cancellation-of-debt tax liability. It’s worth consulting with an attorney about.

Some people think cashing out their retirement savings to pay debts is a good idea. It isn't! Most retirement savings are protected from creditors by law, and you may create tax liability in the process. Many people have refinanced and drawn down their 401(k) plans and still lost their homes when they could have filed bankruptcy and saved them.

Again, it’s worth consulting an attorney before you make a mistake. In fact, if you are experiencing any financial difficulty and the question “Should I file bankruptcy?” has crossed your mind, it’s a good idea to find out your options and plan proactively. Don’t wait until your bank account is garnished or your home is in foreclosure to find out if bankruptcy is the right option. By then, it may be your only option.

If you need advice regarding bankruptcy and potential options, contact us at (206) 397-0020 or westwoodlawoffice@gmail.com. We have extensive experience representing consumer and non-consumer debtors in bankruptcy chapters 7 and 13 and other debt-related matters.

This blog is intended for informational purposes only and does not constitute legal advice or an offer of representation. No attorney-client relationship is intended or created by this article. If you wish to obtain legal representation, please contact Westwood Pacific Law PLLC at (206) 420-2466 or westwoodlawoffice@gmail.com.

Note: Jeff Smoot's book, Making Bankruptcy Work for You: Navigating the Path to Your Fresh Start, published in 2018, is currently out of date due to revisions to bankruptcy rules, forms, and exemption laws. It still has some valuable information about the bankruptcy process but changes in the law and forms require that it be updated. We're working on it! A second edition should be available in 2025.