Struggling with debt is incredibly stressful. Creditors are harassing you. Your wages are being garnished. The thought of losing your home may keep you awake at night.
If you qualify, bankruptcy could be the best option to help you resolve your financial problems. However, there are numerous requirements that you must meet to be eligible for this program. The complexities of the tax code and different restructuring options add confusion to an already stressful situation.
If you are struggling with tax debt and wondering if filing for bankruptcy might be the best choice, contact the Maryland bankruptcy lawyers at S.H. Block Tax Services today for a free consultation. Our law firm has extensive experience handling Maryland bankruptcy cases for both private citizens and companies. When we meet, we can help you determine if you qualify for bankruptcy, and whether or not it’s the best choice for your financial situation.
Who Should File for Bankruptcy?
For individuals and businesses that are buried in debt and don’t see a way out, bankruptcy was designed to be a second chance at a financially successful future. Maybe it was bad decisions, or maybe it was bad luck (often a little of both!), but bankruptcy can allow you to start over, using the lessons you learned the hard way.
However, bankruptcy isn’t necessarily the easy way out. It does not always absolve you of all debts, and it can have long-term ramifications for your credit score and ability to borrow money.
Here are some good reasons to file for bankruptcy:
- You don’t see a way to get ahead of your debts within five years.
- Creditors are suing you or your business.
- You are so behind on your mortgage that you are concerned about foreclosure.
- You have overwhelming medical bills.
- Your business has hit a rough patch, but with a little debt relief you believe you can keep it open.
If your debts are causing you to lose sleep at night and you need a fresh start, bankruptcy could be the right option. Those who wish to file for bankruptcy must meet certain qualifications, depending on their situation and their goals.
Who Is Eligible for Bankruptcy?
The federal government doesn’t let just anyone walk away from their debts. There United States bankruptcy code has strict eligibility restrictions in place regarding income and type of debt. Here are some of the main qualifications for bankruptcy filers:
- For Chapter 7 filers, your income must be below the median income in your state – you must complete a “Means Test” to see if you qualify.
- For Chapter 13 filers, your debt must be below certain limits: less than $1,257,850 in secured debt (like a mortgage or car payment) and $419,275 in unsecured debt (like credit card debt).
- Some debts cannot be discharged by bankruptcy: alimony, child support, federal student loans, and more. Debts that do qualify include medical debt, credit card debt, personal loans, and lawsuit judgments.
- If you have filed for bankruptcy before, there are time restrictions for how soon you can file again.
- If you conceal assets by transferring them to friends or family, or if you increase your debt right before filing, the court may deny your petition to declare bankruptcy.
- Individual filers must complete a credit counseling course prior to filing for bankruptcy.
If you qualify for bankruptcy and think it is your best option, you may still have concerns about losing everything. Filing for bankruptcy doesn’t mean you are left penniless and destitute. In fact, there are different types of bankruptcy that will allow you to keep your home or your business, depending on your situation.
Types of Bankruptcy
When you hear “bankruptcy,” you may think “losing everything and starting over with nothing.” The most common type of debt discharge, Chapter 7, does involve liquidating most assets of value. But other types of bankruptcy involve reorganization or restructuring debts so that they become manageable again. If you can’t meet your current financial obligations, but just need a little more leeway to get back on top of your debts, you have options.
These are known by the chapter of the tax code that governs how and when bankruptcy applies. Let’s dive in to the most common types of bankruptcy filing.
Chapter 7 Bankruptcy
Most petitions for bankruptcy file for Chapter 7, which is a complete liquidation of assets. It can be used by individuals or businesses, in which case a business completely dissolves. All assets are sold and the proceeds are used to pay off debts. For individuals, some assets are exempt (like your retirement savings, and sometimes your house). For businesses there are almost no exemptions; everything goes.
A Chapter 7 bankruptcy stays on your credit report for up to 10 years. Borrowing money becomes nearly impossible because of the hit to your credit score. There are some advantages: the legal fees are low and the process is fairly quick – 4-6 months.
Chapter 11 Bankruptcy
Chapter 11 is used almost exclusively by businesses with a lot of assets, but occasionally individuals who have too much debt to qualify for Chapter 13 will file Chapter 11 (typically celebrities, pro athletes, etc.). A business can be forced into Chapter 11 bankruptcy if three or more creditors file a petition with the courts.
This type of bankruptcy is an effort to keep the business running by reorganizing debt to make it more manageable. A business has 4 months to come up with a plan for reorganization, which typically involves downsizing and selling off some assets in order to repay creditors. If the plan fails, the only option left is a Chapter 7 bankruptcy.
Chapter 13 Bankruptcy
This is another type of reorganization that can be used by individuals and sole proprietors. In order to qualify, your debts cannot exceed $1,257,850 in secured debt and $419,275 in unsecured debt (if they do, you can file Chapter 11). It is not as complicated or expensive as a Chapter 11 filing.
One big difference is that the court appoints a trustee to oversee the plan for reorganization. The trustee is also in charge of collecting payments and paying back creditors.
Filing puts a stop to foreclose and repossession, and a plan to repay the debts within 3-5 years must be put in place. When the repayment plan ends, unpaid unsecured debts may be discharged.
A Chapter 13 bankruptcy stays on your credit report for up to 7 years.
Benefits of Bankruptcy
While bankruptcy is usually a last resort, it’s not all bad news. Once you file, you trigger an “automatic stay,” which prevents creditors from contacting debtors about their liabilities. This means the phone calls from debt collection agencies stop. Wage garnishment stops. The threat of lawsuits stops. You can breathe a sigh of relief, and stop having constant reminders of the stressful situation you are in.
Bankruptcy can be a way to protect your assets if they are exempt. For example, if you were considering tapping into your 401(k) to pay off what you owe, bankruptcy is a way to preserve your retirement funds while still discharging your debts. Similarly, you may be able to keep your house if you can still make payments on it.
For businesses, bankruptcy can be a lifeline to keep the business open if you’ve experienced a temporary hardship—like a pandemic or financial crisis. It may be possible to restructure business liabilities rather than shutter the front doors and liquidate the assets.
In any case, a successful bankruptcy is a fresh start. It is not without its challenges, but removing that heavy burden of debt will reduce your mental load and start you down a path to a better future.
How A Bankruptcy Attorney Can Help
As you can see, bankruptcy is a complicated, nuanced process. It is critical to work with a bankruptcy lawyer in Maryland who can look at your unique situation and determine your best chance for success—whether that means restructuring or liquidating.
At S.H. Block Tax Services, we are compassionate about your situation and want to help you move on to a brighter future. We understand the stress of your debt load, which is why we offer a free consultation to talk about how filing bankruptcy may or may not be the right choice for your needs. While bankruptcy relief might be the best approach, there may be other ways you hadn’t considered to resolve your difficult situation.
Our Maryland bankruptcy attorney, Stanley H. Block, has extensive experience guiding clients through the bankruptcy process and defending their interests in bankruptcy court. In practice for more than 50 years, he understands the ins and outs of bankruptcy law and can help you make a wise decision and get your finances back on track.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.