When a potential client is considering whether or not to file Chapter 7 bankruptcy, I will often tell them about my Chapter 7 bankruptcy “litmus test”. Should you file Chapter 7 bankruptcy, or should you not?
Or, in the most simple form this is the question: can you pay off all of your debt by continuing to do what you are currently doing?
Now, I understand that this seems hopelessly simplistic! And sometimes the answer lies somewhere in the middle, so it’s not completely helpful. But, it really is the best way to go about looking at your situation.
Let’s consider if you answer “yes”. You believe if you continue to do what you were doing, you will get out of your debt. This means that your debt load is manageable given the balance amount and interest rates. In this situation you are paying down the balances on your unsecured debt, and you are able to make your home mortgage and car payments. You’re not falling behind on your taxes, and all of your utilities should be current. If you see your credit card debt balances going down every month, you are well on your way to getting out of your debt!
Now, this does not mean you cannot, or should not, file Chapter 7 bankruptcy if you qualify. If you qualify, it is an option for getting your debt balances back to zero possibly much quicker. Also, even though you are paying your debt down now, you may know that your income will decrease in the future, possibly due to retirement or being laid off. Just because you are paying your debts down does not mean that you are required to NOT file bankruptcy. But, it is a consideration if you wish to avoid it.
Let’s look at the opposite answer to the litmus test. What if you are not paying down your debts? In this scenario you may or may not be paying on your credit cards, but either way the debt balances are not going down. Because of interest and penalties, or because you are only making minimum payments, your total balance due every month is essentially the same. In this scenario you should strongly consider filing Chapter 7 bankruptcy if you qualify. If you’re paying towards your debts and they’re not going anywhere, I call it the “hamster wheel”. Just like a hamster, no matter how fast you move your feet, you end up in the same place at the end of the month. Whatever money you are paying is essentially wasted because it is only covering interest and penalties.
If you believe your income will go up in the near future, or you stand to make a windfall from a lawsuit or an inheritance, you may be able to avoid bankruptcy in this situation. But, if your income looks to be the same going into the future, there probably is no realistic way to pay off your debts. Bankruptcy is always voluntary, of course. But, this is a situation where you should at least strongly consider it, especially if you currently qualify.
If you are not paying your debts down every month and want to consider filing Chapter 7 bankruptcy, contact us at 412-414-9366. I will be happy to go through a free consultation with you to discuss your situation. In many situations the answer will not be clear-cut. You may be lowering your debt balances by small amounts every month, but not eliminating them. I would be happy to talk over the option with you and answer any of your questions!