What if I Don’t Want to File for Bankruptcy?

Maybe you are not sure if bankruptcy is the right direction for you. Sometimes people need to just talk about their story and check out their options. At Seelinger Law, we believe that bankruptcy is a way out, a way to a fresh financial start just as Congress intended, not the nasty “B” word that creditors would have you believe. Many people have misconceptions about bankruptcy. By calling Seelinger Law, you can meet with one of our bankruptcy attorneys to talk about your situation.

You might not need to file for bankruptcy if…

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Reasons Why You May Not Need to File for Bankruptcy

1. You are “Judgment Proof”

You might not have to worry about collection actions by your creditors if you do not own anything that a creditor can legally take from you, under the laws of your state. If you do not have equity in a home, money in a savings account, a valuable and paid for car, or other things of substantial value, you might having nothing to lose by simply not paying creditors.

The downside to relying on this approach is that things could change, if there is a chance that your situation could improve in the near future, while a judgment can remain open against you for years. You might stop being judgment proof and become subject to potential levies on your assets in the future. Keep in mind that if you instead file for bankruptcy, the federal Bankruptcy Code offers persons in most states the ability to exempt a wide range of assets in amounts larger than what would be available under state law as to levy, while collection calls and lawsuits are required to end, immediately.

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2. You can Settle with Your Creditors

If you are not “judgment proof,” because you do have assets which cannot be protected under your state’s exemption laws, it may be possible for you to work out a compromise with your creditors, whereby they agree to accept less than the full amount of the debt and forgive the rest. If you have assets which would be difficult and/or expensive for a creditor to execute on and you don’t have money in the bank with which you could pay the full amount of the debt, a creditor might prefer to accept a lesser amount by agreement, to resolve the debt.

Sometimes individuals hire an attorney to negotiate with creditors, seeking that outcome. If your assets are not too valuable to exempt them in a bankruptcy filing, creditors are more likely to consider a settlement if they believe there is a risk that you will just file for bankruptcy and discharge the debt completely if they do not settle. Before making a settlement with a creditor to pay a reduced amount, look into whether the unpaid balance resulting from the agreement would become taxable income to you. “Debt forgiveness” is often includable in your gross income for income tax purposes, and creditors are required to report debt forgiveness to the IRS. When debt forgiveness is the result of a bankruptcy discharge, rather than by a settlement with the creditor, the IRS excludes the discharged amount of debt from your gross income.

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3. The Debts are not Legally Collectible

If a debt is too old to be enforceable, meaning it is past the time period provided by law to bring a lawsuit, the statute of limitations can be used to defend against any such lawsuit. In fact, it can be a violation of law for a debt collector to even threaten to sue you on a debt which has passed the limitation period.

The statute of limitations is affected by how much time has elapsed since the debt was incurred, and by how long it has been since there was any activity on an account, such as a payment having been made to the creditor. If you know that the creditor no longer has the right to sue you, you may decide to ignore collection requests and not file for bankruptcy. Be aware, however, that the amount of time available for creditors to file lawsuits depends on the type of debt, as well as the laws of your state, so use caution when relying on this means of avoiding bankruptcy.

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4. You Might be Able to Pay Your Creditors, Even if Not “On Time”

If you expect your income to increase, or your expenses to drop, or if you can afford to make payments acceptable to your creditors over time, you might be able to avoid filing bankruptcy by simply “hanging in there,” paying what you are able, while communicating with your creditors about your situation. If your debts can be managed without devastating hardship to you, it may be a bad idea to file for bankruptcy. It is possible that what you consider a lot of debt today might seem a lot different in the future, if things get worse for you financially. No one knows what the future has in store, and all too often catastrophe strikes, through illness, unexpected job loss, or divorce, to name a few unforeseeable possibilities. If you have already filed for bankruptcy before that happens, especially if you filed less than eight years ago, you might not be eligible for a bankruptcy discharge when you really need it.

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5. You Might be Able to Get a Home Equity Loan or Withdraw Funds from Your Pension to Pay Off Debts

This is seldom a good idea. A home equity loan results in a mortgage, usually a second or third mortgage on a home already heavily burdened from the first mortgage, and if you are unable to make the payments on the new loan, you are at risk for foreclosure. If you later file for Chapter 7 bankruptcy, the home equity loan mortgage will not be removed. In contrast, if you did not take out the home equity loan, the unsecured debts can be discharged in bankruptcy. Withdrawing funds from your pension reduces the retirement funds you will need when the time comes for you to retire, and results in tax liability for the amount which must be added to your taxable income.

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Are Debt Consolidation Companies a Good Alternative to Filing for Bankruptcy?

Debt consolidation companies tell you that they can make deals with the banks and settle your credit card debts. Understand that they start taking your money even before they make any contact with the banks. There is absolutely no guarantee that the banks will accept their offer. Be wary of these companies, as they are very good at making promises but very rarely do they follow through. After clients are sued, they are shocked and feel betrayed, as they thought that the debt consolidator had it all under control. Then they find out that after 6 months of payment to the debt consolidation company, the consolidator has not made any headway on their case and all of their creditors are looking to take more aggressive steps.

As attorneys, we at Seelinger Law can make the lawsuit stop. The reason that this company told you not to file bankruptcy is because they find it more profitable for them to steer you away from bankruptcy. If you are currently paying or considering paying a debt consolidation company to help you to negotiation your debt, make sure that you check out your options.

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5148 Peach Street, Suite 330
Erie, PA 16509
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