Bankruptcy and Your Business: Options and Strategies

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Being a business owner can be a very fulfilling experience. Most business owners have poured hours—if not a lifetime—of hard work, dedication, creativity, and perseverance into their businesses. And so one of the most heartbreaking realizations may be that a business isn’t solvent. Unfortunately, this is a reality that many business owners throughout the United States have come face to face with, particularly in the wake of the pandemic. If your business is drowning in debt and you’re feeling overwhelmed and unsure of your options, it’s important to know that bankruptcy may be a solution to saving your business and getting a clean financial slate. To learn more about options and strategies when it comes to bankruptcy and your business, it’s best to speak to a legal or financial professional (or both!). In the meantime, here are some things to know about bankruptcy and your business—

When Should a Small Business File for Bankruptcy?

Before even thinking about the specifics of your financials when you’re in debt, one of the first questions to ask yourself to help determine whether or not bankruptcy is for you is, “Do I still want to keep this going?” If your heart isn’t in it and you’re ready to move on from the business, then it may be time to wind down operations—working with a lawyer can help. If you do want to keep the business going, then here are some other things that you should be thinking about in considering bankruptcy:

  • Have you considered other options? While bankruptcy can be a positive decision for your business, it’s also a very consequential one. This is why before you decide to file for bankruptcy, you should consider all of your options. Other options for your business might include:
  • Debt negotiation. In some cases, you may be able to work with creditors to negotiate your debt repayment. Creditors want to get paid; if there is any chance of you not repaying your debt, they will do what they can to ensure that they get repaid—even if it’s only a fraction of what they were originally owed. An attorney can lead the negotiation process. 
  • Debt consolidation. Another option for managing your debt is to consolidate your debt. Debt consolidation is the process of merging all of your debt together into one single bill. This can help you to manage interest rates and payments, and may make repaying your debt more feasible. 
  • Refinancing. If you have loans that you’re defaulting on, working directly with the bank to refinance your loan, including a mortgage loan if applicable, is strongly recommended. A bank may be able to adjust your interest rates or loan repayment terms in order to make your monthly payments more affordable. 
  • Are you eligible for bankruptcy? Once you’ve weighed all of the options, another important consideration is whether or not your business is even eligible for bankruptcy. While there are no debt or income requirements or limitations for filing for bankruptcy under Chapter 11, there are such requirements and limitations for filing for other bankruptcy types. Review your options with a professional so you’re clear on what you can and cannot do. 
  • Do you understand the benefits and consequences of bankruptcy? Finally, before you decide to file for bankruptcy, it’s important that you understand all of the benefits and consequences of filing. Bankruptcy can help you to get out of debt, but it will also make it very hard to borrow money for years into the future. 

Bankruptcy Options for Small Businesses 

For small business owners, there are three typical options for filing for bankruptcy; however, which type of bankruptcy you can file for will depend on your business structure, debt level, and income amount. 

  • Chapter 7 bankruptcy. Chapter 7 bankruptcy is for a sole proprietor who meets the means test, which means that they don’t have the income and assets to repay their debts. This type of bankruptcy will erase business and personal debts. 
  • Chapter 13 bankruptcy. A Chapter 13 bankruptcy is similar to a Chapter 7 bankruptcy, except that there is no means test and, because the debtor has a sufficient level of income and assets, they will enter into a repayment plan. This type of bankruptcy is not available for partnership. LLCs, or corporations. 
  • Chapter 11 bankruptcy. Finally, a Chapter 11 bankruptcy is the third option for small business owners and large business owners. This type of bankruptcy can be filed by LLCs, corporations, partnerships, and sole proprietors, although it is rare for sole proprietors to choose this option. In this type of bankruptcy, the debtor’s debts are reorganized, similar to how they are reorganized in a Chapter 13 bankruptcy. 

Learn More Today

If filing for bankruptcy is something you’re thinking about, working with a professional who has experience representing businesses like yours is strongly recommended. Learn as much as you can and seek representation before taking any actions. 

Bankruptcy and Divorce — Navigating the Complexities

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It’s not uncommon for divorcing couples to also research their options for debt relief. According to a 2018 survey by Ramsey Solutions, money issues are the top cause of conflicts among spouses. 

But if you’re thinking about filing for both divorce and bankruptcy, it’s important to understand your options. Making the wrong choice or not filing in the correct order could have enormous financial and other negative consequences. On the other hand, there may be benefits to approaching these items a certain way. Here’s what you need to know to navigate these complexities. 

How Different Types of Bankruptcy Impacts a Divorce

When filing for personal bankruptcy, you have two options — Chapter 7 and Chapter 13. Chapter 7 bankruptcy requires that you satisfy a “means test” and will take about 3-4 months to complete. Once done, you can discharge the debts included in the bankruptcy prior to the divorce. 

However, many couples find that their joint income is too high for them to qualify for Chapter 7. In other words, they won’t meet the means test. This type of bankruptcy might also require liquidating some assets to repay debts. 

Chapter 13 is a different type of bankruptcy, which is more of a debt reorganization. You create a repayment plan lasting 3-5 years to repay a portion of your debts. Choosing this option would tie you financially to your spouse for several years to come. 

Ways Bankruptcy and Divorce Courts Handle Property

Addressing your debt situation through bankruptcy can simplify the property division process in a divorce. However, it’s essential you understand how exemptions in your state work so you can protect as much property as possible. For example, some states allow you to double the exemption amount if you file jointly. If you can’t double your exemptions, it might make more sense to file separately. 

How Bankruptcy and Divorce Courts Handle Debt

Litigating which debts each spouse should be responsible for in a divorce can be a time-consuming and costly process. Also, assigning the debt to one spouse through a divorce decree doesn’t necessarily relieve the other’s obligations. For example, if your ex was ordered to pay off a certain joint credit card and they didn’t do it, the creditor can still pursue you for full payment. 

One of the benefits of handling bankruptcy is that debts get addressed first. Spouses can address their debt situation by discharging joint debits and eliminating unwanted contracts, like underwater car loans or mortgages. You also get the benefit of an automatic stay, which prevents creditors from making harassing phone calls or sending letters and emails to collect debts. 

Should You File Bankruptcy Before Divorce?

If you qualify for Chapter 7 bankruptcy, it’s often beneficial to file for bankruptcy before divorce. While this will delay your divorce proceedings by several months, it makes more financial sense to choose this option. But couples who can’t pass the Chapter 7 means test or who simply can’t work together any longer may need to wait until after the divorce to address their debt issues through bankruptcy. 

What About Getting Divorced Before Filing for Bankruptcy?

Some couples might find that it makes more sense to file for and finalize their divorce first and then deal with bankruptcy separately. Maybe one of you wishes to file for Chapter 13 bankruptcy because it will allow you to keep more property. Or you may not be able to pass the means test for Chapter 7 bankruptcy as a couple, but you can pass it individually after your divorce. 

There are also many instances where the lines of communication between divorcing spouses have become so broken that cooperating in a bankruptcy proceeding just isn’t possible. The potential downside to waiting until after you divorce, however, is important to understand. Specifically, if one spouse is able to get a discharge of joint debt, creditors may be able to pursue the other for the full amount of the debt. 

Is Filing for Both at the Same Time a Good Idea?

The one thing you want to avoid is filing for bankruptcy and divorce simultaneously. Both cases will impact each other, particularly when it comes to property and debt. This is more likely to cause repeated delays, especially in your divorce proceedings. 

Bankruptcy is one of the many debt relief options divorcing couples should consider when there is unmanageable debt. But it’s never a good idea to jump into a complex legal process like bankruptcy without understanding the facts. An experienced bankruptcy attorney can explain your options and guide you through this process. This ensures you are making sound decisions that will help you get a fresh financial start. 

The Pros and Cons of Filing for Bankruptcy: Is It Right for You?

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For many people, there are few things more stressful than worrying about money. While most people may feel some financial tension at some point in their life, for some, this tension can be omnipresent. Being worried about being able to pay your bills, make your mortgage or rent payments on time, or feed your family can be a terrible feeling, especially if it’s gotten to the point where creditors are constantly calling or threatening legal action. 

If you have found yourself in a place of financial despair, it’s important that you understand your full range of legal options. While it’s often considered a last resort, filing for bankruptcy could help. Here’s an overview of what you should know about the pros and cons of filing for bankruptcy, how to determine whether bankruptcy is right for you, and how you can learn more about the bankruptcy process.

What Is Bankruptcy?

Bankruptcy is a legal, court-facilitated process through which a person seeks relief or partial relief from their debts. There are multiple different types of bankruptcy and the type of bankruptcy that an individual files will be dictated in part by the amount of income and assets they have. If a person has enough income, they may enter into a repayment plan through a Chapter 13 bankruptcy; otherwise, they may qualify for a Chapter 7 bankruptcy. 

Pros of Filing for Bankruptcy

Filing for bankruptcy can have many benefits if you are a person who has exhausted all of your other debt-relief options. Some of the main advantages of filing for bankruptcy include:

  • A fresh financial start. As explained by the American Bar Association, perhaps the most important advantage of filing for bankruptcy is that filing for bankruptcy provides a debtor with a fresh financial start. This allows an individual with freedom and peace of mind to move forward with their life with a clean financial slate. This can be a very important time of financial recovery and restarting. 
  • The automatic stay. One of the biggest benefits of filing for bankruptcy is that upon filing, the automatic stay will go into effect. The automatic stay is an immediate pause on all debt collectors’ ability to collect on a debt. Once the bankruptcy process is initiated, a debt collector is legally barred from contacting you to collect on debt while the proceeding is ongoing
  • Ability to keep many assets in some cases. Depending on the type of bankruptcy for which you file and your individual financial situation, filing for bankruptcy may actually allow you to keep many of your assets, especially if you file for a Chapter 13 bankruptcy.
  • Sense of closure and relief. Financial insolvency can be overwhelming. When you file for bankruptcy, there can be a sense of relief and closure that comes with it. This can be good not only for your finances but also for your mental health. 

Cons of Filing for Bankruptcy

While there are many advantages of filing for bankruptcy, the process isn’t without some risks and downsides. These include:

  • Hit to your credit. Chances are that if you are filing for bankruptcy, your credit score is already fairly low. That being said, if you file for bankruptcy, your credit score will drop even lower—and the bankruptcy will stay on your credit report for between 7-10 years. 
  • Challenges securing housing, financing, or certain jobs. Having bankruptcy on your credit report can make it hard for you to take out a new line of credit, get a loan, get approved for a mortgage or a housing rental application, or even get a job in some cases (depending on the industry in which you work). 
  • Loss of some assets. If you file for a Chapter 7 bankruptcy, your non-exempt assets will be subject to seizure and will be liquidated in order to pay back your creditors to the extent possible. This might mean that you could lose a home, car, or another valuable asset by filing. 

Is Bankruptcy Right for You?

Whether or not filing for bankruptcy is the right decision for you really depends on your situation. If you have exhausted other debt-relief options, such as debt consolidation, creditor negotiation, refinancing, asking friends and family for help, and more, then bankruptcy may be the best option. However, you should always consult with a financial or legal professional before filing for bankruptcy to make sure you understand the pros and cons that filing for bankruptcy brings to your life.

Bankruptcy vs. Debt Relief

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Facing large amounts of debt can be a very startling and upsetting reality. Before you know it, spending and debt may become out of control, leaving you worried about the future, facing creditors, and even potentially becoming the subject of lawsuits and asset seizures. During our current financial times, this has happened to many residents of Mississippi’s Gulf Coast. 

As you think about your options and what your next steps are for gaining your financial footing, you may be thinking about bankruptcy. Before you file, it is important that you understand all of your debt relief options. As you navigate these options, working with a Mississippi bankruptcy lawyer may provide valuable insight and guidance.

What is Bankruptcy?

Bankruptcy is the court-facilitated process of settling or/and discharging a person’s debt. A bankruptcy judge oversees the process, which may involve a debtor liquidating their assets and repaying creditors or/and entering into a repayment plan that becomes a legal obligation through the court. 

A bankruptcy filing will remain on a person’s credit score for between seven and 10 years and, while it can certainly provide a financial fresh start, it can also make it difficult to secure new sources of funding, a credit card, or a mortgage. It can also make it difficult to secure certain jobs in some cases.

Bankruptcy is typically considered a last-resort option that people only consider after they have exhausted other debt-relief options. It should be undertaken only after counsel with a financial professional or/and lawyer to ensure that the applicant understands all benefits and consequences, as well as what type of bankruptcy they are eligible for and how to correctly initiate and move through the process. 

Other Debt Relief Options

As stated, bankruptcy is usually something that people pursue only after they have explored other debt-relief options to no avail. Of course, depending on your level and type of debt, as well as other factors—such as your current assets and sources and level of income—other debt-relief options may be perfectly satisfactory in helping you to right your financial footing. 

Some examples of other debt relief strategies include:

  • Debt settlement. One type of debt relief option that may be practicable for Mississippi Gulf Coast residents is debt settlement. Debt settlement is a negotiation between you and your creditor(s) that essentially states that you will pay a certain amount in exchange for your total amount of debt being reduced. For example, if you owe $100,000, a debt settlement agreement could include you making a payment of $75,000 over the course of a certain amount of time at a fixed interest rate. The important components of a debt settlement agreement are that 1) you agree to pay the agreed-upon amount and 2) you are getting something beneficial out of the agreement, such as a reduced debt amount or another accommodation, like lower interest payments.
  • Debt consolidation. Another strategy for alleviating debt may be debt consolidation. The idea behind debt consolidations is that multiple, separate debts are all consolidated into a single debt. This can make it easier to manage payments. For residents of Mississippi’s Gulf Coast who have the income to make payments but are struggling with how to prioritize repayment, debt consolidation can be very beneficial. 
  • Refinancing. When a person is facing a large amount of debt, they may be at risk of losing their home or other assets if they are defaulting on these loans. Rather than rush into bankruptcy or just continue to fail to make payments, refinancing may be an option. Lenders want to get repaid, and if repayment can only happen if the terms of the loan are adjusted, a lender may be eager to do this. For example, a lender that serves the Mississippi Gulf Coast may be able to lower your monthly payments in exchange for a longer loan term with higher interest rates. You’ll end up paying more overall but will have less of an immediate financial burden.
  • Credit counseling/budgeting. For some people, getting out of debt may start—and end—with forming good financial habits. Attending financial classes aimed at learning how to create and maintain a budget, make smart decisions with credit, and save for the future can be very valuable. Typically, this approach is combined with another debt relief method.

Be Aware of Scams and Get Legal Help 

As you consider various debt relief options, including bankruptcy, it is important to know that scammers are out there who are looking to take advantage. For example, there are companies that may agree to help you settle your debt in exchange for a large fee. Some of these companies are legitimate; others should be avoided. If you are unsure whether you should work with a company or how to proceed as you seek financial security, it is strongly recommended to consult with a financial professional or Mississippi Gulf Coast bankruptcy attorney to review your options. 

How to Rebuild Your Credit After Bankruptcy

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Filing for bankruptcy may be the best decision for you if you are suffering from high amounts of debt. However, while filing for bankruptcy can help to discharge your debts or create a manageable repayment plan, it’s important to know that a bankruptcy filing will have a major impact on your credit score. To be sure, filing for bankruptcy can show on your credit report for between seven and 10 years after your filing, making it difficult for you to secure new lines of credit, get a loan, or even be hired for certain jobs.

Fortunately, there are steps that you can take to rebuild your credit after bankruptcy and get yourself back on stable financial footing. Here are some tips for rebuilding your credit after bankruptcy:

  1. Keep Up with Your Current Payments

The number one most important thing that you can do when you are recovering from bankruptcy is to refrain from incurring any new and unmanageable debt. This means that if you do have any existing lines of credit, it is essential that you keep up with your current payments—this means making payments on time and in full each month. Making your monthly payments should be your number one priority.

And it’s not just loans and credit cards—if you have other bills, such as medical bills, utility bills, etc. that could result in your account being turned over to collections, do everything in your power to find a way to pay these down.

  1. Monitor Your Credit Score

Not only should you keep up with your monthly payments, but you should also have a solid idea of where your credit score currently sits and what impacts it. Fortunately, there are free and easy ways to do this. One option for checking your credit score at no cost to you is to use AnnualCreditReport.com.

In checking your score, make sure that you flag anything that doesn’t look right—such as a claim that you didn’t make a payment in full that you believe you did. If something is misreported on your credit report, you have the right to challenge it.

  1. Consider a Secured Credit Card

One of the downsides of filing for bankruptcy is that it can make it difficult to get a credit card until the bankruptcy filing is no longer reflected on your credit report. One strategy for getting around this hurdle is to open a secured credit card. A secured credit card is a type of card that is backed by a deposit that you pay. For example, you may have to make a deposit of $500 in order to get a credit card with a $500 limit. It may not sound like much, but it can be the first step toward responsibly using credit again. Note that in addition to a deposit, secured cards typically also have higher interest rates and may carry annual fees as well, so be sure to weigh the benefits and tradeoffs before choosing this type of card.

  1. Create Good Overall Financial and Budgeting Habits

Making credit card payments on time and in full and responsibly using a new credit card will be rooted in good financial habits. After bankruptcy, it’s a smart idea to set some financial goals for yourself. For example, now’s the time to review your spending-to-income ratio and create a budget, build up an emergency fund, and understand the best practices for spending as they relate to housing, credit, and more.

  1. Find a Co-Signer

Sometimes, rebuilding credit after a bankruptcy filing can feel a bit like a chicken and egg scenario—you know you need to rebuild your credit score, but you need a credit card to do so; however, you can’t get a credit card or open a new line of credit or a loan because your credit score is currently too low!

This can be frustrating, but it’s not helpless. One option for opening a new line of credit or securing a loan is to find a co-signer. If you have a close friend or family member who has a strong credit score and a stable source of income and who is willing to co-sign for you, this can help build your score. However, it is a big ask of your friend or family member—and they’ll be on the hook for any missed payments, too.

Start Rebuilding Your Credit After Bankruptcy Today

Filing for bankruptcy can be a scary decision, but it may be the best one to give yourself the clean slate you need to move forward. Once your bankruptcy filing is complete, it’s time to start rebuilding your credit. Keeping up with your current payments, monitoring your credit score, considering a secured card, creating good overall financial and budgeting habits, and finding a co-signer for any new loans or lines of credit can all help.

The Effects of Bankruptcy on Co-signers and Guarantors

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There are many situations in which a person may turn to a co-signer or guarantor in order to secure a line of credit, loan, or another form of financing. For example, if a person is buying a house but cannot qualify for the loan on their own, they may ask a parent to co-sign. Similarly, a spouse may co-sign on a credit card, or a business partner may co-sign on a business loan. When another person guarantees to make the payments in the event that the borrower defaults, they are called the guarantor; this type of relationship is very common in financial transactions that involve borrowing money.

While relying on a co-signer or guarantor is a perfectly legitimate way to secure financing, it’s important to know that there are consequences for both the borrower and the guarantor in the event of a default. Here’s an overview of what you should know about the effects of bankruptcy on co-signers and guarantors, as well as how a bankruptcy attorney may be able to help you understand your options and put your best foot forward.

What Risks Do Cosigners and Guarantors Face?

The most important thing that co-signers and guarantors should know before they put their name next to a borrower is that regardless of what the original borrower does, they are responsible for the debt. This means that if you, the borrower, fail to make payments, then the creditor has every right to go after the co-signer/guarantor for repayment.

How Will My Bankruptcy Impact My Co-Signer or Guarantor?

When you file for bankruptcy, the “automatic stay” is triggered. The automatic stay is a legal pause on a creditor’s ability to collect on the debt, prohibiting the creditor from contacting you about collecting payments while the bankruptcy case is pending. While the automatic stay protects you, it does not protect your co-signers. So, while a creditor may be legally barred from contacting you for repayment, they do have every legal right to go after your guarantor(s). As such, your co-signers will be on the hook for any amount of money owed.

What If My Debt Is Discharged as a Result of Bankruptcy?

Depending on the type of bankruptcy for which you file, your debt may be discharged. Remember, though, that your filing for bankruptcy eliminates your responsibility to pay your debts—it doesn’t have anything to do with the debts and liabilities of any co-signers. Indeed, if you file for a Chapter 7 bankruptcy, your guarantor will receive no protection from creditors before, during, or after the bankruptcy case.

A Chapter 13 bankruptcy, also known as a wage earner’s bankruptcy, on the other hand, may provide some protection. In a Chapter 13 bankruptcy, co-signers and guarantors actually are protected by the automatic stay (although creditors can ask the court to lift these protections). Chapter 13 bankruptcy also results in a repayment plan, giving you time to pay off your debt so co-signers and guarantors aren’t impacted.

Finally, it should be noted that while a co-signer may be on the hook for your debt, your bankruptcy filing won’t have any impact on their credit report. A bankruptcy filing will significantly harm your credit score and may make it difficult to borrow money or secure a loan in the future.

What Should I Do If I Can’t Make Payments on a Debt?

If you are struggling to make payments on a debt and you have a co-signer or guarantor listed on the debt, one of the first things that you should do is talk with them. Remember, if you default on the debt, creditors can go after them and their failure to make payment could impact their credit. By providing them a heads-up, you may be able to get ahead of the problem early.

If making payments feels impossible and bankruptcy feels like the only option, you should also consider debt consolidation, credit counseling, credit negotiation, or loan modification/refinancing. Creditors and lenders want to get paid and are often willing to work with those who are struggling to make repayments to restructure payment or interest amounts.

If bankruptcy truly is your only option, then working with a skilled bankruptcy attorney is strongly recommended. An attorney can help you to exhaust all other options first and also help you to understand the types of bankruptcy and the requirements for filing for different types of bankruptcy. If your co-signers or guarantors have questions about how your bankruptcy may impact them, your attorney can help to provide answers to these questions, too.

Bankruptcy and Your Retirement Savings: What You Need to Know

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Facing financial ruin is incredibly stressful. If you are being contacted by creditors, are at risk of losing your house, or have had a lawsuit filed against you to collect on a debt, you should be thinking seriously about your options. One way to seek a clean slate is to file for bankruptcy. 

While bankruptcy has some consequences, it can also help you to gain your financial footing. If you’re thinking seriously about filing for bankruptcy, it’s important that you understand the impact that bankruptcy can have on your finances, including your retirement savings. Here’s what you should know about bankruptcy and your retirement savings—to learn more, it’s recommended that you contact a financial or legal professional.

Using Retirement Funds for Debt

When thinking about your financial options when facing bankruptcy, you may think about withdrawing funds from your retirement accounts in order to help pay down some of your bills. While this could help you to stave off creditors and alleviate your debt, remember that withdrawing retirement funds can have consequences. 

Withdrawing retirement funds before reaching retirement age can result in hefty tax penalties, which could only exacerbate your financial dilemmas. Unless withdrawing retirement funds is your only option—and even then, you should seek professional advice first—keeping funds within your retirement accounts is almost always the best thing to do.

What Happens to My Retirement Funds During Bankruptcy?

Whether you are filing for a Chapter 7 or a Chapter 13 bankruptcy, the good news is that in most cases, you’ll likely get to hold on to your retirement or/and pension funds. However, there are some exceptions to this general rule. 

When you file for bankruptcy, regardless of whether you file for a Chapter 7 or Chapter 13 bankruptcy, you get to keep exempt assets. (Other, non-exempt assets are liquidated and used to pay back creditors.) In fact, under the federal tax code, all types of individual retirement accounts (IRAs) are substantially protected from creditors during a bankruptcy filing, as are pension plans, 401(k)s, and other employer-sponsored qualified retirement plans. 

How Much Is Protected During Bankruptcy?

For ERISA-qualified retirement accounts, which stands for Employee Retirement Income Security Act, the retirement account cannot be taken from you by the bankruptcy trustee appointed to your case. ERISA plans are inclusive of 401(k)s, 403(b)s, 457(b)s, governmental plans, and plans offered to employees by tax-exempt organizations. Bankruptcy law also protects IRAs, including traditional IRAs, Roth IRAs, SEP-IRAs, SIMPLE IRAs, and other similar retirement plans. 

If you file for bankruptcy, you can protect up to $1,512,350 held in your IRA. Note that if you have more than one IRA, the $1.5 million threshold doesn’t apply to both accounts individually, but is the combined amount you can protect. 

Are There Any Retirement Savings that Aren’t Protected in a Bankruptcy Filing?

As explained above, you cannot protect amounts over $1,512,350 (adjusted for inflation every three years) in a bankruptcy filing. What’s more, if you have other forms of savings that you plan to use for retirement, these funds will likely not be protected in a bankruptcy filing. You won’t be able to protect:

  • Any funds withdrawn from a tax-benefited retirement account
  • Funds held in a savings account
  • Money held in an investment account
  • Stock option plans

Should I File for Bankruptcy?

If you’re thinking about filing for bankruptcy, it’s important that you understand all of your options and the consequences associated with a bankruptcy filing. In most cases, filing for bankruptcy is a last-case resort that should only be pursued once other options have been exhausted. Other options that should be explored first include debt consolidation, refinancing, and credit negotiation.

If you do decide to file for bankruptcy, note that any savings that you hold in tax-advantaged retirement accounts will likely be protected, up to a certain threshold. This should provide some peace of mind in the event that you file.

Working with a Professional Is Always a Good Idea

Deciding to file for bankruptcy is a big decision and one that you likely shouldn’t make on your own if you’re not a financial professional. When you consult with a financial professional or/and a bankruptcy attorney, you can learn more about the process, the risks, the benefits, and how to get started. A professional can answer your tough questions about bankruptcy, help you know which type of bankruptcy you’re eligible to file for and advise you on asset protection throughout the process. 

Bankruptcy and Tax Debt: What You Need to Know

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If you have thought about bankruptcy, chances are that your understanding of bankruptcy is that filing for bankruptcy will eliminate your debts and give you a clean slate moving forward. While it’s definitely true that bankruptcy can provide a fresh start, it’s important to understand that not all debts are forgivable in a bankruptcy filing and that for some types of debt, what you can discharge depends on the type of bankruptcy for which you file.

When it comes to tax debt, there’s a common misconception that if you have tax debt and file for bankruptcy, the government will forgive all of your debts—including your tax debt. Unfortunately, this just isn’t necessarily true. Here’s what you should know about bankruptcy and tax debt—remember, it’s always good to talk to a professional before filing for bankruptcy.

Can You Discharge Tax Debt?

If you are filing for bankruptcy and have tax debt, there are only certain situations in which you may be able to discharge your tax debt. In fact, you can only discharge tax debt if the following criteria are satisfied:

  • The tax debt is only for income tax. If you owe taxes for anything other than taxes on earned income, you cannot discharge it in a bankruptcy filing.
  • The tax debt occurred as a result of an honest mistake or debt—it cannot have occurred out of willful evasion or tax fraud.
  • You filed a tax return for the tax debt that you are trying to discharge. In some courts, you can’t discharge debt even if you filed a late return, so make sure you ask the legal professional you’re working with if this applies to you.
  • The tax debt must be at least three years old.
  • Enough time must have passed. The IRS maintains what’s known as the 240-day rule, which means that the income tax debt must have been assessed at least 240 days before you file for bankruptcy.

Only if your debts meet all of the criteria above may they qualify for discharge during bankruptcy.

What About a Tax Lien?

If you fail to pay a tax debt, the government may issue what’s known as a tax lien. A tax lien is the government’s claim against your property. If the tax debt isn’t repaid, the lien gives the government the right to seize the debtor’s property. If the debtor does repay the debt, then the tax lien may be removed.

The bad news about having a tax lien—even if you’ve repaid it or are in the process of repaying it—is that you cannot discharge a federal tax lien, even if the tax debt meets the criteria for discharge listed above. That’s because the purpose of bankruptcy is to wipe away a personal tax, not to wipe out tax liens recorded prior to the bankruptcy filing.

Discharging Tax Debt and Chapter 13 vs. Chapter 7 Bankruptcy

The primary difference between a Chapter 13 and a Chapter 7 bankruptcy is that you must pass the means test to qualify for a Chapter 7 bankruptcy. With a Chapter 7 bankruptcy, your non-exempt assets will be liquidated, and your remaining debts will be discharged; with a Chapter 13 bankruptcy, on the other hand, you will enter a repayment plan to pay back debts and, in exchange, will be able to keep more assets. So how does this apply to those who want to discharge tax debt?

With a Chapter 13 bankruptcy and tax debt, some dischargeable tax debts might be forgiven without any repayment depending on the amount of disposable income you have. In any case, you won’t incur any interest on the tax debt that you owe.

If you file for a Chapter 7 bankruptcy on the other hand, your debt will be discharged if your debt meets the qualifications listed above and if you pass the means test—an income assessment that determines whether you have enough disposable income to pay back any portion of your existing debts.

Learn More About Bankruptcy and Tax Debt

If you are in a financial situation where bankruptcy is your best option, it’s important that you understand what debts may be dischargeable and how what you currently earn will impact which type of bankruptcy you file for, and how much of your overall debt is dischargeable. If you have questions about tax debt, you should consult with a financial professional or a bankruptcy lawyer. Filing for bankruptcy is a huge decision that will have a long-term impact on your financial health. Learn as much as you can before filing and explore all of your options in advance.

How Does Bankruptcy Impact My Credit Score and Financial Future?

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When you are facing large amounts of debt, understanding all of your options for getting your finances under control and improving your financial future is important. Depending on the specifics of your situation, options that may provide economic relief include debt consolidation, refinancing, creating a budget, or working with a debt counseling or financial planning expert. When these options fail, however, filing for bankruptcy can be the best option.

Before you rush into filing for bankruptcy, it’s important to understand how the bankruptcy process works, what type of bankruptcy you may be eligible for, what debts might be forgiven, and how bankruptcy can impact your credit score and financial future. If you have questions or want information that’s specific to your case, it’s best to work with a bankruptcy lawyer or financial professional.

The Two Primary Types of Bankruptcy for Individuals

If you are an individual who is thinking about filing for bankruptcy, there are two types of bankruptcy that are most common: Chapter 7 and Chapter 13. You may be eligible for one of them, but not both. Note that the impact that bankruptcy will have on your credit score depends, in part, on which type of bankruptcy you file for.

  • Chapter 7 bankruptcy. A Chapter 7 bankruptcy, also called liquidation bankruptcy, is a type of bankruptcy where your non-exempt assets are liquidated (sold for cash) and that money is used to pay off your creditors to the extent possible; then, any remaining debts are discharged. In order to qualify for a Chapter 7 bankruptcy, you must pass the means test. The means test is a way to determine whether you have the income and assets to go through the Chapter 13 bankruptcy process instead.
  • Chapter 13 bankruptcy. If you do not pass the means test, then your other option for filing for bankruptcy is to pursue a Chapter 13 bankruptcy. Also known as a wage earner’s bankruptcy, in a Chapter 13 bankruptcy, the debtor enters into a repayment plan that lasts for between three and five years. While a debtor will repay a significant portion of their debts in a Chapter 13 bankruptcy before debts are forgiven at the end of the repayment plan, one of the biggest advantages of this type of bankruptcy is that most assets are exempt from liquidation and are therefore protected.

Note that in both types of bankruptcy, not all debts are dischargeable. For example, student loan debt and outstanding support payments from civil cases are usually unforgivable.

How Bankruptcy Will Impact Your Credit Score and Financial Future

While bankruptcy can provide financial relief and help you get the footing you need to start making smart financial decisions moving forward, it’s important to know that there are some consequences of filing for bankruptcy. Most notably, bankruptcy can have a very negative impact on your credit score.

While chances are that your credit score is already pretty low if you’re in a financial position to be filing for bankruptcy, a bankruptcy filing will drop it even further. What’s more, filing for bankruptcy will stay on your credit score for seven years for a Chapter 13 filing and 10 years for a Chapter 7 filing.

Not only will you have a low credit score for the next seven to 10 years if you file for bankruptcy, but you may also have a hard time securing a line of credit or taking out a loan, too. If you want to purchase a home, mortgage lenders will be very hesitant to work with you. This can make it hard to build backup credit after bankruptcy, and may also leave you in a position where you are forced to rent because you cannot secure a mortgage loan.

Finally, depending on the industry in which you work, your employer may have the right to do a financial background check on you and could deny you a job because of a bankruptcy filing on your record.

Always Seek Professional Help When Thinking About Bankruptcy

The specific impact that a bankruptcy filing may have on you depends on the details of your financial situation and the type of bankruptcy you ultimately file for. Before you take any further action, it’s strongly recommended that you consult with a financial professional who is experienced in bankruptcy filings. From financial planners to bankruptcy lawyers, an experienced professional can provide you with the guidance and answers you need to make a smart, informed decision.

When Should I Consider Filing for Bankruptcy?

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Managing your finances responsibly may sound like an easy task, but for many, making smart financial decisions isn’t always as obvious as it seems. From accidents and unexpected illnesses that lead to medical debt to low-paying jobs and layoffs that cut income streams, there are dozens of legitimate reasons why a person may be struggling to pay off debt.

While there is no panacea to managing or eliminating debt, there are many options depending on the details of your financial situation. One option for dealing with debt is to declare bankruptcy. However, before filing for bankruptcy, it’s important to consider your full financial picture and make sure you have an understanding of the consequences—both positive and negative—of bankruptcy.

Here’s an overview of a few things you should consider when filing for bankruptcy:

What Is Bankruptcy?

Bankruptcy is a legal proceeding that happens before a court. In a bankruptcy hearing, some debts may be discharged, assets may be liquidated to pay creditors, or/and the debtor may enter into a repayment plan with creditors.

While some debts are dischargeable in a bankruptcy hearing, it’s important to note that not all debts are forgivable. What’s more, while filing for bankruptcy may give you a clean financial slate that helps you to manage your debts, it severely impacts your credit score and can make it difficult to get approved for a loan for years in the future.

Things to Think About Before Filing for Bankruptcy

If you are drowning in debt, filing for bankruptcy may be an option that’s on the table. Before you file, however, there are multiple things you should think about first. Some of the most pressing items for consideration include:

  • Other debt-relief options. While bankruptcy can be a great option, note that it’s an intensive legal proceeding that can take time and money, and have long-term implications on your overall financial well-being. As such, it’s usually recommended as a last resort after other debt-relief options have been considered. Consider debt consolidation or negotiation, and talk to a financial professional about all of your options before filing.
  • Types of bankruptcy. If you’re thinking about filing for bankruptcy, it’s important that you understand the types of bankruptcy and which type may be most appropriate for your situation. For individuals, the two most common types of bankruptcy are Chapter 7 and Chapter 13.

Chapter 7 bankruptcy requires a debtor to liquidate any of their non-exempt assets. In order to qualify for a Chapter 7 bankruptcy, a debtor must pass a means test proving that they don’t have the income and resources to enter into a repayment plan. The alternative for those who don’t pass the means test is a Chapter 13 bankruptcy, which requires repayment of debt through a repayment plan but also allows a debtor to keep more of their assets.

  • Whether you need legal support. As you think about the bankruptcy process and the many legal documents and the court proceedings that filing for bankruptcy requires, you may consider hiring a lawyer. Before you hire a lawyer, it’s important to have a consultation first where you can ask any questions, get a feel for the attorney, and learn more about fee structures.
  • Your need for immediate relief. If you need immediate relief because you are being contacted by debt collectors nonstop and are at risk of having assets seized or having your home foreclosed on, filing for bankruptcy may be your best option. This is because when you file for bankruptcy, your filing will immediately trigger the automatic stay. The automatic stay in a bankruptcy case is an immediate pause on the ability of any creditor to contact you. This can provide you with the short-term relief and breathing room you need to take charge of your financial situation.

How to Learn More About When It’s a Good Time to File for Bankruptcy

One of the most important things to know about bankruptcy is that it’s not a decision you should take lightly. Before you file, you should learn as much as you can about all of your options, as well as what the bankruptcy process entails, whether you’re qualified to file for bankruptcy and if so, which type of bankruptcy is appropriate for you, and what the short- and long-term consequences of filing for bankruptcy will be. You should also consider whether you want to work with a legal or financial professional during your bankruptcy case.

Finally, while debt can feel terrifying and overwhelming, know that there are options available. By seeking help, you can start making smarter financial decisions that support your financial well-being long term.