Bankruptcy Helps Individuals with Debt

Debt CollectionI hate to admit it, but bankruptcy doesn’t help everyone.  Sometimes I meet with people who have serious financial difficulties, and there is nothing I can do for them.  These people usually have one of two types of problems.

The first problem is that they do not earn enough income to support their household expenses but have no debt.  If a person’s financial problem is that they do not earn enough income to support their household, and they are not paying off debt, then bankruptcy is probably not going to help.  Bankruptcy is about discharging and reorganizing debt.  If there is no debt to discharge or reorganize then bankruptcy is not the answer.  In this type of situation the answer is usually to reduce expenses through budgeting and careful allocation of resources or increasing income by working more hours, finding a better job, finding a roommate, etc.

The second problem is when debtors have a significant amount of debt but it is of the type that cannot be discharged in bankruptcy.  The most common types of debts that cannot be discharged are student loans, child support, and income taxes.  A debtor may have a huge amount of debt, but if it can’t be discharged then bankruptcy is not going to help.  In fact, filing bankruptcy may exacerbate the problem.  In Chapter 13 bankruptcy cases debtors are required to pay back all priority debts during the duration of the plan.  These plans usually last five years.  If a debtor has a significant amount of child support arrears or income tax, then a payment plan with the IRS or the Attorney General may allow for a longer repayment period than if the debtor was to file Chapter 13 bankruptcy.

Student loans don’t have to be paid in Chapter 13 cases.  Debtors pay this type of debt only if they have disposable income that can be dedicated to repayment of unsecured debt.  However, deferring repayment of student loans for five years does not stop the interest from accruing.  Temporarily stopping student loan payments now could cause big trouble down the road.  For more information about whether filing bankruptcy will help your financial situation, speak with a local bankruptcy attorney.