When bankruptcy is not an option

The purpose of a discharge is to “relieve an honest debtor of his or her financial burdens and facilitate a debtor’s ‘fresh start’ without liens.” In re Pelkowski, 990 F.2d 737, 744 (3d Cir. 1993) (citing Kokoszka v. Belford, 417 US 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 deliver assets to the trustee in excess of the amount that can be protected under the exemption laws. Otherwise, if you are unwilling to give up 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 are unwilling to surrender those assets. You see, a Chapter 7 bankruptcy case is considered a liquidation bankruptcy where you cannot afford to make any payments on your debts. If you have no assets, then you have nothing to lose and everything to gain by filing for 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.

One key to success is consulting with at least two or three bankruptcy attorneys because I hear from clients that we are not all the same. One might think so, but it is simply not true. Not all bankruptcy attorneys are experienced and you could end up losing assets if your attorney is not well versed in exemption laws and how to protect your assets or warn you if you are at risk of losing assets. If you are in a Chapter 7 case and at risk of losing assets, you have the right to convert your case to Chapter 13 and make a payment plan, if your budget allows. Unfortunately, once you’ve attended that Section 341(a) hearing called the “Meeting of Creditors,” most trustees won’t allow a dismissal, making it difficult to escape the powers of the trustee.

Another reason bankruptcy may not be right for you is when you make too much money and would be paying 100% of your debts. That’s when bankruptcy is optional and you should weigh 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 paid off interest-free, making it more affordable than a traditional payment plan with most unsecured credit card debt. Another benefit of a Chapter 13 case is that not all creditors file claims to receive payment. This means that the amount you owe today may decrease after you file bankruptcy. A third benefit of a Chapter 13 bankruptcy is that there are no tax consequences for debts discharged in Chapter 13. None of these benefits are available outside of bankruptcy.

Finally, a fresh start in bankruptcy is for the “Honest but Unlucky Debtor.” This means that you cannot hide or give away all your belongings and expect bankruptcy results. If you are facing a fraud lawsuit or have been sued for fraud, you may not be eligible to file for bankruptcy. The only way to find out is to have a free consultation with a bankruptcy attorney who has experience in your local courts. The longer they have been in practice, the more informed they will be and the better their 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.

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