Risks of Not Filing Bankruptcy

There are significant risks associated with not filing a bankruptcy when a bankruptcy is needed. Some of these risks are:

Income. Someone who is between jobs or with a low income may be in the best position to file a bankruptcy. Because if he waits until his income increases, he may not qualify for a Chapter 7 discharge. This is especially true for the tech sector and other high paying areas. Once the high paying job is secured, the chances of qualifying are greatly diminished.

Urgencies. Sometimes the filing of a bankruptcy by be urgent. But quite often the debtor does not recognize the urgency because he not familiar with bankruptcy law. You may wish to see our discussion relating to URGENCIES The failure to file a bankruptcy when an bankruptcy is necessary or urgent will result in the relinquishing of significant rights and financial advantages.

Judgments. Anyone who has a judgment against you can take your money right out of your bank account without your permission and engage in other equally dis-appealing collection procedures. A bankruptcy can prevent this.

Business bankruptcies. A bankruptcy can save a business - or provide the basis to begin a new one. But you must leave yourself both time and assets to fund a reorganization.

Tax problems. Talk to your CPA about the effect of write-offs and settlements outside of bankruptcy. If a credit card company or any other creditor decides not to sue you to collect, then it writes off the debt and takes a deduction on its taxes. When it writes off the debt, it sends notice of that write-off to the IRS. Under certain circumstances the IRS will require you to treat that write-off as income and pay tax on it (see Section 108, Internal Revenue Code). The same is true for settlements and for debts that can no longer be collected because a time period has run. The tax on that income is non-dischargeable in bankruptcy for at least three more years. A debtor who anticipates this and files a bankruptcy before the write-off erases the debt in bankruptcy and avoids both the debt and the tax. Debt discharged in bankruptcy cannot be treated as income under any circumstances.

IRS federal tax lien and garnishments. A federal tax lien effectively removes all of the equity in your homestead to the extent of the outstanding taxes, penalties and interest. A bankruptcy can prevent this.

Consumer Credit methods. If you can pay your debts within a reasonable time and with reasonable effort, you should do so and not file a bankruptcy. However, if the reality is that you cannot, but you engage a consumer credit organization to consolidate your bills anyway and you later default, then all you have paid to the consumer credit organization will be essentially lost. It is not wrong to file a bankruptcy if you need to do so. See our discussion relating to the ETHICS of filing a bankruptcy.

Credit rehabilitation. Contrary to popular belief, bankruptcy is not the end if your credit, but the beginning of it. If you are at the point of filing bankruptcy, then your credit is already at its end or will be quite soon. Bankruptcy is not the end of credit but the end of debt, and the beginning of the process of rebuilding your credit. Consider where you will be financially in two years. Suppose you file a bankruptcy and discharge your debt today, and then use the bankruptcy discharge to live debt free for two years. What will your credit be like in two years? It will be largely rehabilitated. But what will your credit be like in two years if you do not obtain a discharge of debt?

Suppose in two years you speak to a banker about a loan and he asks about your financial condition. Is it better to say that you never filed a bankruptcy but you still owe a large amount of money and have been named in several lawsuits, or is it better to say that you filed a bankruptcy two years ago and since that time you have lived totally without debt?

Suppose in two years you speak to a banker about a loan and he asks about your financial condition. Is it better to say that you never filed a bankruptcy but you still owe a large amount of money and have been named in several lawsuits, or is it better to say that you filed a bankruptcy two years ago and since that time you have lived totally without debt?

Foreclosures. Foreclosures of non-homestead property can produce drastic tax problems that can be avoided in a bankruptcy. See URGENCIES.

Patient creditors. Patient creditors with judgments can be dangerous. They often wait until you are on your feet again and then they will collect by taking your money right out of your account. And if you have a significant income by that time, you may not be able to obtain a Chapter 7 discharge even if you do file.

Charles Chesnutt