Deciding to file for bankruptcy is a hard decision for many people. You might worry about the costs and time involved and think the money you will have to pay could go toward your bills. Many people also worry about the social stigma of bankruptcy and the loss of financial privacy.

However, bad things sometimes happen to most people, and bankruptcy exists to provide relief to people who are unable to repay their debts. San Jose bankruptcy attorney Ike Shulman at the Shulman Law Offices understands how difficult it can be for people who are struggling under the weight of unmanageable debt.

If you are in that type of situation, filing for personal bankruptcy might be the best option. Here are five common reasons why declaring personal bankruptcy might make financial sense.

1. Personal Liability for Debts From a Small Business

When people start businesses, they encounter risks. Businesses fail every year and for many different reasons, including economic downturns and others. According to the Wall Street Journal, 200,000 more small businesses than normal closed during the COVID-19 pandemic. In February 2021, CBS News reported that nine million small businesses in the U.S. said that they feared they wouldn’t survive because of the pressures of the pandemic.

If you are a small business owner as a sole proprietor, a business failure could leave you facing substantial debts and a lack of income to repay them. In sole proprietorships, the business debts pass through to the business owner, meaning that the owner is personally liable for the debts incurred by the business.

If your small business has failed, filing for Chapter 7 bankruptcy might protect you. Chapter 7 bankruptcy involves the liquidation of certain assets to repay a small percentage of what is owed. Once a discharge is granted, the remaining unsecured debt balances do not have to be repaid. However, filing for Chapter 7 personal bankruptcy will also result in a permanent closure of your business.

If you and your small business have accumulated substantial debts that you cannot repay, you can also consider Chapter 13 bankruptcy. In Chapter 13 bankruptcy, you will propose a repayment plan to repay some of your debts over a period lasting from three to five years.

With this type of personal bankruptcy, you will not necessarily have to close your business. Instead, you can restructure your debt. Once you have completed your repayment plan, the remaining unsecured debt balances will be discharged, meaning you will no longer be legally obligated to pay them.

In many cases, small business owners with excessive business debts that they cannot repay can find relief through bankruptcy courts. If you have not been able to negotiate a solution with your creditors and cannot repay your debts, bankruptcy might make financial sense. People might be able to survive a few financial downturns, but when their situations become unmanageable, they might need to ask for help through bankruptcy protection.

2. Unexpected and Catastrophic Illnesses or Injuries

Many people are forced into financial difficulties when they suffer catastrophic injuries or devastating illnesses. Even with health insurance, medical bills and prescription costs can quickly pile up. According to a survey conducted by the Kaiser Family Foundation and the New York Times, one million Americans filed for personal bankruptcy protection because of medical bills. The researchers also found that 26% of adults between the ages of 18 and 64 have trouble paying their medical bills, which amounts to approximately 52 million people.

While health insurance coverage might pay for some of your medical bills, many people have insurance with high deductibles that must be met before the insurance will kick in. Copays can also quickly add up for treatment, rehabilitation, and prescriptions.

If you are seriously ill or injured, you might also have lodging and travel expenses to receive the treatment you need and might be left with a disability that prevents you from returning to work. Catastrophic injuries might also require you to make modifications to your home. All of these types of expenses can quickly mount.

If you do not have short- or long-term disability insurance, you might be left without an income when you sustain serious injuries or develop a serious medical condition like cancer. This type of situation might mean that you do not have money to meet your basic living expenses let alone to repay your medical debt and related costs.

Bankruptcy can provide tremendous relief to people struggling with overwhelming medical debt when they are not anticipating further debts. In this type of situation, if you anticipate needing additional treatment from the same providers, they might not agree to treat you unless you can prepay for their services once you have discharged your medical debts in bankruptcy. A bankruptcy attorney at the Shulman Law Offices can help you determine the best time to file under your specific circumstances.

3. Debt Accumulations During Periods of Extended Unemployment

If you have ever been unemployed for a lengthy period, you likely understand how quickly your bills can add up. If you later return to work, it can be difficult to repay the debts that you accumulated during an extended period of unemployment.

While people might have received unemployment benefits, the benefits payments are much lower than the incomes people earned while they were working. This means that unemployment benefits are frequently insufficient for people to use to repay their debts.

Unemployment compensation benefits typically are low enough that they barely cover people’s basic utilities, food, and housing costs. Debt payments can quickly grow during periods of unemployment, and people might also exhaust their savings just trying to get by. If you are in this type of situation, bankruptcy protection might help to provide you with some relief.

4. Lawsuits

In some cases, people are sued for large amounts of money and lose. If you lost a lawsuit and did not have liability coverage to protect you, you might never be able to pay the judgment. If the case against you did not involve allegations of fraud, civil judgments can be discharged in bankruptcy.

Some people cannot afford to pay to defend themselves against lawsuits or pay judgments that are issued against them.

When a bankruptcy petition is filed, the court will issue an automatic stay. This is an injunction that orders creditors to stop all collection activities, including judgment creditors. If your judgment is discharged in your bankruptcy, you will not have to pay it. Filing for bankruptcy protection also stops existing lawsuits against you from proceeding. For example, if one of your creditors filed a lawsuit against you to collect on a debt, filing for bankruptcy will prevent the case from going through further court proceedings.

Filing for bankruptcy protection can also result in a discharge of personal injury case judgments against you. If you file for bankruptcy while a personal injury claim against you is still pending, the plaintiff in the case can ask the bankruptcy court to lift the automatic stay so that the case can continue. However, if the bankruptcy court denies the request, the court proceedings will have to stop.

There are two types of situations in which the bankruptcy court cannot discharge personal injury judgments. If you were sued because you were driving while impaired by alcohol or drugs and caused an injury accident, you cannot discharge the judgment against you in bankruptcy. Similarly, the bankruptcy court also cannot discharge judgments against you for intentional torts.

5. Getting A Divorce

Getting divorced can be financially devastating for many people. Some couples who get divorced might have decided to end their marriages because of the financial problems they faced. If you and your spouse both plan to file for bankruptcy to deal with the debts you accumulated during your marriage, it might make sense for you to file for bankruptcy together before you file a divorce petition.

Waiting to file your petition for divorce until after your bankruptcy case is over can make the division of assets and debts in your divorce case much simpler. Filing for bankruptcy before you file for divorce also can be less expensive for both of you since you will only have to pay one filing fee instead of two by filing a joint bankruptcy petition.

If you have already filed for divorce, your bankruptcy attorney can talk to you about when to file your bankruptcy petition. If you file a petition for bankruptcy while your divorce case is pending, it will stop any division of assets and debts in your divorce case. This means that your divorce might take much longer to resolve. However, the family court can still issue orders to establish child support and child custody.

After your divorce, you might also be in a financially precarious position. Going from two incomes to one can be difficult, and you might no longer be able to afford the lifestyle you have grown accustomed to. You might also be responsible for paying some of the debts that your spouse accumulated during your marriage along with jointly held debts. Bankruptcy can help by discharging these types of debts so you can enjoy a fresh start as a newly single adult.
Does Filing for Bankruptcy Make Sense in Your Situation?

Declaring Personal Bankruptcy

Bankruptcy will remain on your credit for several years, making it important to carefully consider declaring personal bankruptcy whether it makes sense in your particular situation. You should be clear about what you want to accomplish by filing for bankruptcy.

Filing a bankruptcy petition makes sense when you have debts that can be reorganized or discharged, and the issue that led to your need for bankruptcy is not continuing. Filing for bankruptcy can provide you with financial relief. However, it will not help you end poor spending habits. Bankruptcy is also not a solution for having an income that is insufficient to cover your needs.

After you file for bankruptcy and receive a discharge, it is a good idea for you to carefully budget your money to avoid getting into financial straits again. While you can file for a second bankruptcy, you will have to wait for multiple years before you will be allowed to do so.

If your minimum debt payments exceed your monthly mortgage payment or rent, filing for bankruptcy might be a good idea. Your attorney can review your current budget to determine whether you are at a point where you are unable to afford to make your payments.

If you are nearing retirement, getting out of debt so that you can save for retirement might be important. If you do not have any savings built up for retirement and have significant debt, filing for bankruptcy might make sense so that you can work on building your savings after your debts are discharged.

Talk To an Experienced Bankruptcy Attorney

Regardless of the reasons that caused your current situation and financial problems, bankruptcy might offer a good solution and a way to start over. If you are concerned about the social stigma and loss of financial privacy you might face by filing for bankruptcy, others will remember you by how you treated them rather than the fact you filed for bankruptcy. To learn more about the financial remedies that might be available to you through bankruptcy, contact the Shulman Law Offices today for a free consultation by calling 408-297-3333.