One of the main motivators for people to file bankruptcy is putting a stop to creditors’ collection efforts. There are a few important things I want to remind you about creditors, beginning with the fact that there are two types: secured and unsecured. The most common examples of secured creditors are car lenders and mortgage companies (your loan is secured by the car or the house, so what these creditors can do is foreclose on your house or repossess your car.) Your other creditors have no such security. Before unsecured creditors can garnish your wages, seize any of your property, or take money out of your bank account, they are required to obtain a court judgment.
So, in considering whether to file a Chapter 7 bankruptcy, it’s important for you to figure out two things:
a) Does most of the debt you owe fall into the category that requires creditors to obtain a judgment, or can the creditors you owe take immediate action, such as repossession?
If you have tax debt, don’t assume bankruptcy can’t help, because, if certain conditions are met, as I pointed out in an earlier blog (see “Chapter 7 Bankruptcy And Tax Debt – Give Me A Five!”), income tax debt can be eligible for a discharge under bankruptcy.
Student loans are another story. Unless you can prove permanent and total disability, it’s highly unlikely student loan debt would be discharged in bankruptcy. However, the people pursuing you to collect on the student loan debt can be put “on hold” for up to five years, buying you some time to get back on your feet.
b) Is your property, and is your income, of the type that is subject to seizure if your creditors were to obtain a judgment?
For example, if most of your income comes from Social Security (either Social Security Disability or Social Security Retirement benefits, that income can’t be taken by creditors. Wages withheld by your employer for contributions to retirement plans (or money the employer is contributing to your retirement plan) cannot be touched by creditors. What about your assets? If what savings you have is in retirement plans such as 401K, 403B, SIMPLE plans, or IRAs, or even in tax deferred education plans such as 529’s, that money cannot be seized by creditors.
If all or most of any property you have (besides the secured debts on your home and car) is exempt from creditors’ seizure, even if they get a judgment, your assets will be “judgment-proof”.
You may still choose to file bankruptcy, even though your property and income cannot be seized, in order to “seize” the opportunity for a fresh financial start!