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  Advantages of Filing Bankruptcy -
 


     There are numerous advantageous aspects of filing bankruptcy. These alone can be sufficient to merit a bankruptcy filing. Some of these advantages include:
  • Discharge of debts
  • Tax relief
  • Getting more money for assets
  • Emotional relief
  • Family and friends can be repaid
  • All debts in one location
  • Possible increase of homestead exemption
  • Keep consumer goods at a reduced price
  • Bankruptcy can be relatively cheap
  • Positive impact on credit
Discharge of Debts

     Discharging or "wiping out" one's debts is perhaps the biggest benefit of a bankruptcy filing. A bankruptcy discharge erases a debtor's personal liability for a great number of debts. These include credit cards, medical bills, deficiency amounts owed on cars, boats, or other items, negligence claims, business bills, unpaid rent, some older taxes, personal loans, "sold-out" junior liens, and other debts. This is the most common reason to file bankruptcy. The discharge means that the creditor can never collect or attempt to collect the debt from the debtor ever again, amounting to a permanent injunction against collection.

 

Tax Relief

     Filing bankruptcy can sometimes help a debtor from a tax perspective. Some taxes can be discharged, or wiped out, in bankruptcy. These are generally taxes more than 3 years old which meet 4 additional criteria as well. In Chapter 13, taxes can be paid over 5 years with no interest, and the penalties eliminated. In Chapter 11 the taxes need to be paid with interest at the IRS statutory rate, but the payments can be stretched out over 5 years.

     This is a very complex area and should be studied thoroughly by your bankruptcy attorney and tax counsel before the decision is made to file a case for tax purposes.

Getting More Money for Assets

     In many situations, especially business matters, a debtor may have numerous creditors who are taking collection action against him. Often, there is a real "race to the courthouse" to see who can get to the debtor's assets first. This can result in assets sold off in piecemeal fashion through repossession, UCC-1 lien sale, mortgage foreclosure sale, or sheriff's execution sale. Most of the time, this type of sale does not bring in "top dollar", because of the uncertainty involved and the hesitancy of potential buyers to bid at such sales. Many times, there are no bidders other than the foreclosing or selling party, who will simply put in a credit bid and no new cash.

     A bankruptcy filing allows these same assets to be sold by the debtor or trustee, over a reasonable period of time, and with ample notice to possible interested parties. This can result in a higher sales price for the assets. Also, business assets can be sold in bulk and as a going concern, which generally will trigger a higher sales price from the right buyer. As a general rule, assets sold at bankruptcy sales do not have issues with title, because, for instance, there is no requirement that such sales comply with state bulk transfer laws.

Emotional Relief

     Bankruptcy filing can give the debtor a needed moral and emotional boost. This can be a key part of any bankruptcy strategy. Individuals with financial problems are often depressed, discouraged, and beleaguered, and have a poor outlook on life. They are anxious, stressed-out, and nervous about their financial matters. This can carry over into all phases of life and seriously impact personal and family relationships. Filing for bankruptcy can alleviate this emotional burden to a great degree. Bankruptcy itself can be a difficult process, but it generally results in a positive outcome from the mental and emotional well-being standpoint.

Family & Friends Can Be Repaid

     One consideration is where the debtor has borrowed money from family or friends. The bankruptcy laws require that all of these debts be listed, and that they be treated in the same fashion as other debts. However, once the case is over, there is nothing that prohibits a debtor from voluntarily repaying a debt to a family member, friend, or anyone else for that matter. Financial relationships between family and friends often result in tension and friction which may tend to fray relationships, but they are often unavoidable and a part of everyday life. Consideration should be given to these relationships before a bankruptcy is filed.

All Debts In One Location

     Often, a debtor will have lawsuits in several courts, collection activity, an out-of-court foreclosure, and perhaps cases in tax or family court. A benefit of bankruptcy is that it provides one forum or location for all of the debtor's debts to be handled. Creditors can participate in the case by just filling out a proof of claim form and attaching supporting documents. They do not have to sue the debtor with a full-fledged lawsuit, as is required in state court. This can result in considerable efficiency and savings in terms of time and expense.

Possible Increase of Homestead Exemption

     Bankruptcy law imposes certain restrictions and caps on homestead exemptions under certain circumstances. It can also operate to increase a particular debtor's available exemption. This might occur where a debtor owns a home, a creditor has obtained a judgment against him, and then recorded an abstract of that judgment, imposing a lien on the house. Under traditional state law, the debtor's homestead exemption would be limited to the dollar amount of the homestead exemption then in effect. This is true even if the exemptions subsequently increased. However, if this debtor files bankruptcy, then he is entitled to claim the exemptions in place on the date of the bankruptcy filing, which in most cases is an increased amount. This can be a very beneficial strategy in cases where the state homestead exemption has gone up.

Keep Consumer Goods at a Reduced Price

     In a Chapter 7 case, the individual debtor may end up being able to "buy" back from a secured creditor, like Best Buy, consumer electronics or other goods at a greatly reduced price. Common items include computers and big-screen TVs. Debtor fills out the required Debtor's Statement of Intention, and then "redeems" the item from the lien of the creditor. Debtor pays only the current value of the item. This can result in potential savings of thousands of dollars from what is owed on the contract. The only drawback is that the creditor can insist on a one-time lump-sum cash payment. This is a strategy that may work to the debtor's benefit.

Bankruptcy Can Be Relatively Cheap

     Bankruptcy can be a true bargain, where you can "get a lot of bang for your buck". If a debtor pays $ 2500 in fees and costs to wipe out $ 100k of credit card debt, it is not a bad investment. In fact, the $ 2500 probably amounts to one or two months of credit card payments at the minimum amount due. Often, bankruptcy fees and costs pale in comparison to fees charged in state court matters.

 

Positive Impact on Credit

     Bankruptcy often has a positive impact on one's credit. This is the case where a debtor has been late on his payments, or has had collections and lawsuits on his credit report. In those cases, as soon as the debtor receives his discharge, his credit will immediately start to improve.

     In other cases, the debtor may have an 800+ FICO score, no lates and "perfect" credit. At the same time, he may have $ 200-300k of credit card and other unsecured debt that he simply has been juggling for years, making minimum payments and borrowing from account to account, on the proverbial treadmill, getting nowhere in trying to pay it down. When he files, his credit score will plummet. But, in most instances, it will be worth it to obtain the debt relief. In many cases, a debtor does not need credit, because he may already own a home and car with decent interest rates and monthly payments. The credit factor is one to consider when evaluating options.

Written by Henry Rendler





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