Ask the Attorney: Debt Management or Bankruptcy?

The short answer is: it depends.

What makes sense for one person may not make sense for another based on your financial situation. If the stars are lined up properly, a Chapter 7 bankruptcy is sometimes the perfect solution to your financial woes.

If you fit the profile for a Chapter 7 bankruptcy, the main drawback is the negative impact on your credit score; but let’s be honest here. If you are this close to filing bankruptcy, your credit is probably not that great to begin with. Sometimes the only way to rebuild a house is to tear it down and start over, which is what a Chapter 7 bankruptcy will allow you to do.

It is important to remember that a Chapter 7 bankruptcy will liquidate, or wipe out, most of your unsecured debts (like credit cards and medical bills), where a debt management program simply reduces interest rates and allows you to repay over time. But there are strict rules involved in debt management that usually prohibit you from using your cards again for any reason. Here are some factors to consider:

Do you own or rent your home? One of the big stumbling blocks for people wishing to file bankruptcy is that they have too much equity in their homes. To figure out how much equity you have, simply take the current value of your home and subtract how much you owe on your mortgages; be sure to include home equity loans in that figure. A single person can still file with about $20,000 in equity, and a married couple can file with about $40,000 in equity. With falling home values, many people who have been unable to file bankruptcy in the past may be able to do so now.

The question that usually accompanies the discussion of home equity is whether or not you can keep your home, and the answer is usually “yes.” As long as you are willing to keep making your mortgage payments (which will be much easier if you wipe out a ton of credit card debt), you can keep your home. Cars typically fall under the same category; you can keep them if you continue to make payments.

There is a simple test I give people who are contemplating bankruptcy. Since a Chapter 7 bankruptcy can stay on your credit report for up to seven years, take an honest look at your debt and ask yourself if you will have it paid on your own within seven years. If the answer is “no”, and it almost always is, then you need to seriously examine whether a Chapter 7 bankruptcy is right for you.

This article is intended as a discussion of legal topics that are often confusing to many laypeople; it is not, and should not be relied on, as legal advice. The views expressed in this article are those of the individual contributor and do not necessarily reflect the opinions of the PA Focus.

Attorney Jesse White is licensed to practice solely in Pennsylvania and any information discussed relates solely to Pennsylvania law. The hiring of a lawyer is an important decision that should only be made after careful consideration. If you feel you need to hire an attorney, contact The Law Office of Jesse White at 724-743-4444 for free written information about areas of practice and experience.