Not all debtors who file New York bankruptcy do so with no assets, no job, and no secured debts. For these debtors, a straight chapter 7 bankruptcy will suit them perfectly. Other debtors, though, may have more at stake. They may have savings, for instance, that offer a choice: file bankruptcy or try paying off their debts on their own. I’ve discussed how researchers disagree over debt-management strategies, but the question I’m presenting is one level higher. Assuming a debtor can choose going about repaying his or her debts alone, when is it worth doing so?
Debtors trying to repay debts out of savings gain a few advantages. One, assuming their debts have not injured their creditworthiness already, bankruptcy does affect debtors’ credit ratings. Of course, in many circumstances filing bankruptcy improves credit scores. There’s also the costs and hassle of finding a bankruptcy lawyer, assembling the documentation, and then going through the bankruptcy process. Some people feel empowered by resolving their debt problems on their own.
On the other hand, bankruptcy can save debtors some money for multiple reasons. One, many types of savings are exempt. In particular, debtors sometimes liquidate their retirement accounts to pay their debts. This is almost always a bad idea. In bankruptcy, the federal exemptions shield more than $1 million in IRAs and 401(k) accounts, and New York’s exemptions protect them completely. In bankruptcy, debtors would be able to discharge their debts and keep all their savings. This is also an argument against taking out loans against one’s 401(k).
Two, some amount of non-retirement savings can often be protected with cash exemptions. The federal exemptions offer debtors $1,250 in a wild card exemption plus up to $11,850 in an unused homestead exemption. In New York, debtors who don’t take the homestead exemption receive a $1,100 wild card exemption plus the lesser of $5,525 or $11,025, minus their personal property exemptions. I encourage debtors to use exemptions and other debts to soak up excess cash.
Three, it’s also possible that spending the retirement accounts won’t be enough to repay the full amount of the debts anyway, so the debtors would have to file bankruptcy anyway. What makes this situation especially unfortunate is that debtors who go this route do not get their money back from their creditors.
Ultimately, the question of how to deal with debt is one of sunk costs: What is the best alternative as of now for dealing with debt? If you are facing financial difficulties, then talking to an experienced New York bankruptcy lawyer will help you sooner than you think.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
