declaring personal bankruptcy

5 Reasons Why Declaring Personal Bankruptcy Can Make Sense Financially

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.


bankruptcy frequently asked questions

Top 7 Most Commonly Asked Bankruptcy Questions

Shulman Law Office provides clients with effective legal representation in cases involving bankruptcy proceedings. Federal law allows individuals to petition for bankruptcy in situations where they face crushing debt. However, in order to qualify to file for bankruptcy protection, you must be willing to honestly disclose all of your property and liabilities.

#1: What Is Chapter 7 & Chapter 13 Bankruptcy?

These are the two types of bankruptcy that are most commonly used by individual debtors. Both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy are defined under federal law in specific terms, so legal services are essential when navigating the bankruptcy system. Both of these chapters allow people to have certain debts that can’t be paid eliminated through the bankruptcy process.

To qualify for bankruptcy protection, the petitioner must disclose all of their assets and debts, as well as their income and expenses. Other financial information must also be accurate and truthful. This is required by the bankruptcy laws in order to qualify.

Chapter 7 is also known as liquidation bankruptcy because the non-exempt assets will be liquidated in order to pay off debts owed to creditors. However, this chapter also contains a provision for claiming exempt assets, which can be kept by the debtor. Once your exempt (protected) assets are defined, the bankruptcy trustee will liquidate any non-exempt assets. These funds will be used as payment to your creditors.

Chapter 13 is also called reorganization bankruptcy. This requires the debtor to fill out paperwork which is similar to that necessary when filing for Chapter 7, but you also need to propose a repayment plan. Chapter 13 allows you to retain your assets under the conditions of your repayment plan. This plan will take from 3 to 5 years in order to repay a portion of the original debt. The exact amount to be repaid is determined on a case-by-case basis.

Some items that can affect the total repayment amount include the following:

  • Debtor’s income
  • Type of debt owed
  • Value of non-exempt assets

After the bankruptcy process is finished, most debtors enjoy a fresh start in their financial lives. This can be the right solution for people with overwhelming debt, but it’s important to speak with a bankruptcy attorney to make sure you do it correctly and with a full understanding of all of your rights.

#2: What Assets Can I Protect if I File for Bankruptcy?

Filing for bankruptcy is a process that can place your assets in a position of being sold to repay your debts. However, there are exemptions that allow you to protect some, and possibly all, of your assets. Exemption is a term used to describe certain assets that qualify for this protection in your bankruptcy case.

For example, household goods, non-luxury vehicles, tools for your profession, clothes and retirement accounts are often exempt. If the asset is exempt, the bankruptcy trustee isn’t allowed to take it and sell it to pay your creditors.

Assets are protected by an exemption list, determined state-by-state. There are two lists available in California, and the debtor can select the list which will protect more of his/her property.

Chapter 7 offers protection for your assets up to the amount of your exemptions. However, Chapter 7 permits the bankruptcy trustee to sell any non-exempt assets to pay the amounts owed to your creditors.

Chapter 13 provides the greatest amount of protection for assets. This option allows you to keep all of your property, including non-exempt assets, as long as you set up a Chapter 13 repayment plan to pay your creditors over time for the value of your non-exempt assets.

The bankruptcy attorney can provide detailed advice on which chapter suits your needs best, and which exemption list is the most protective for your particular assets.

#3: Can Bankruptcy Stop Creditors From Garnishing My Wages?

Filing bankruptcy is a lawful method that you can use to stop creditors from garnishing your wages or taking money directly from your bank account. Once you file the bankruptcy petition, your creditors become unable to sue you,garnish your wages or seize your bank account during the bankruptcy. This protection will allow you to continue to make your rent, mortgage, utility or car payments on time.

Petitioners are granted automatic protection from this type of collection by the filing of a bankruptcy case. In other words, filing bankruptcy provides you with an automatic shield against debt collectors. This is also called an "automatic stay" on collections. If someone has filed a lawsuit against you, the automatic stay will be in effect until the bankruptcy process if finalized.

This protection even extends to collection efforts made by the Internal Revenue Service. However, bankruptcy protection isn’t effective in shielding a debtor from efforts to collect on child or spousal support obligations.

#4: Can I Save My Home From Foreclosure in Bankruptcy?

Home foreclosures are affected differently in Chapter 7 and Chapter 13 cases. In Chapter 7 bankruptcy, the foreclosure is temporarily halted, which may give a debtor a very short time to get caught up on missed mortgage payments. However, home lenders have the ability to ask the court for permission to complete the foreclosure sale.  Also, once the chapter 7 case is completed, the home lender is free to resume foreclosure.

Filing for Chapter 13 bankruptcy will stop a foreclosure sale, allowing you to propose a chapter 13 repayment plan which can include any missed mortgage payments. You can also physically remain in your home during this process. Contact a bankruptcy attorney before the foreclosure sale date in order to fully understand this option and what payments will be needed to make it successful.

#5: Will My Retirement Accounts Be Protected in Bankruptcy?

Retirement accounts are generally eligible for protection from collection by any creditor. This includes 401(k) retirement plans if the money was contributed to the retirement plan according to the rules of the IRS. IRA accounts are also protected up to a certain amount. There are other exceptions, so talk to your bankruptcy attorney about how to protect your retirement accounts during bankruptcy.

#6: How Does the Automatic Stay Protect Me?

The automatic stay prevents creditors from taking specific actions against the debtor. As soon as you file a bankruptcy case, the automatic stay goes into effect. It functions as an injunction, and it prohibits creditors from taking a variety of actions to collect on the debt. Prohibited actions include vehicle repossessions, home foreclosures, wage garnishments and even harassing phone calls. Generally, creditors are forbidden from contacting you, your associates, neighbors or members of your family. Instead, creditors must communicate directly with your attorney.

Other prohibited actions include the following:

  • Eviction
  • Legal actions
  • Litigation
  • Disconnecting utilities

Bankruptcy filed under Chapter 13 will also protect co-borrowers from collection on consumer debts. However, the co-borrower isn’t protected if the bankruptcy is filed under Chapter 7. Once the automatic stay goes into effect, the chapter 13 debtor can work with the bankruptcy attorney and come up with a plan to also protect the co-borrower.

However, there are certain actions that can occur during a bankruptcy case. For example, if you’re involved in a criminal case, these charges can move forward even though actions to collect on fines, bad checks and other debts are prohibited.  Also, collection of child or spousal support can continue to during a bankruptcy case.

#7: Is It Too Soon to Talk to a Bankruptcy Lawyer About My Debt Problem?

Talking to a bankruptcy attorney can help you to decide on a course of action, and getting started right away can help you avoid common mistakes. Legal advice is definitely necessary when facing repossessions, foreclosures or wage garnishments. It can also be helpful in avoiding future tax debts, by obtaining from your current debts instead of borrowing against retirement plans. Rather than making a hasty decision to withdraw funds from your retirement accounts, contact a bankruptcy lawyer to see if there is a better option.

There is no reason to delay setting up an appointment to talk to your bankruptcy attorney about the options available. In fact, starting early can help you reduce the stress involved, while allowing you enough time to make a sound plan. The consultation will help you to sort through your non-exempt assets, debt obligations and protected assets. This process can also help you figure out if you stand to benefit more under Chapter 7 or Chapter 13 bankruptcy.

Contact a Professional Bankruptcy Attorney

Anyone who faces threats from creditors should consider the value of consulting a bankruptcy attorney. The bankruptcy lawyer can provide options if you’re experiencing stress just trying to figure out how to pay your debts. Bankruptcy can protect you while buying some time to set up alternative arrangements with creditors. Shulman Law Office is available to help you sort through various bankruptcy issues, and you can contact the office for a free consultation.