New! Eligible SoFi members can invest in upcoming IPOs before they’re traded on the public market—only in the SoFi app.* Learn more

Understanding Bankruptcy: Is it Ever the Right Option?

April 22, 2019 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Understanding Bankruptcy: Is it Ever the Right Option?

Many people in financial trouble think of bankruptcy as the last resort, not as the best resort. Although declaring bankruptcy can often come with a social stigma, it can also be considered a chance for you to start over again. What’s most important is not how you may be judged, but if declaring bankruptcy is a viable option for you.

Bankruptcy may not be the right solution for everyone, but for some, it’s a chance to eliminate a great deal of financial stress and an opportunity to remake your financial life. Think of a car horn that’s stuck, blaring for hours, and then suddenly, it stops—all is quiet and you can think clearly again.

That stopped horn could mean the end of collection calls and letters, as well as the endless hand wringing and nights of no sleep.

Even so, declaring bankruptcy is not something you should take lightly. Bankruptcy options still have a general public perception of shame and failure, and it could stand in the way of you getting a job, or obtaining new lines of credit .

When To Consider Bankruptcy as a Solution

Life circumstances and financial situations may vary from person to person, so there may not be a fast and hard rule for when to declare bankruptcy. However, ask yourself the following questions , and see if you answer yes to two or more of them. If so, you may want to give bankruptcy some consideration and speak with a consumer law attorney:

•  Are you only able to make minimum payments on your credit cards?

•  Are you getting calls from debt collectors?

•  Does the idea of organizing your finances make you feel hopeless or scared?

•  Are you using your credit card to pay for necessities?

•  Is debt consolidation a solution that may have recently occurred to you?

•  Are you not certain how much debt you actually owe overall?

There are two types of bankruptcy options for individuals:

Chapter 7 : this is bankruptcy in its most basic form, as a “liquidation.” The debtor’s nonexempt possessions, such as homes and cars, are sold to repay existing debts.

Chapter 13 : Also known as a “reorganization bankruptcy,” this is a repayment plan that may last 3-5 years. For debtors owing less than $307,675 in unsecured debt (often credit card debt) and less than $922,975 in secured debt (often mortgages and cars).

The main difference between the two options:

Chapter 7 allows the debtor to eliminate all dischargeable unsecured debt.

Chapter 13 allows for payments to be made on those debts.

For both options, you must obtain credit counseling within 180 days of filing for bankruptcy (this is mandatory).

Chapter 11 is a bankruptcy option designed specifically for businesses.

Before you consider bankruptcy, explore every other available option to see if any of them could be the right solution for you.

Alternatives to Bankruptcy

Legitimate Credit Counseling

A counselor or counseling service specializing in helping people with debt problems might be able to come up with a solution that has not occurred to you.

Be sure to choose a legitimate service service that provides free information, most likely a nonprofit organization. Note that not all nonprofit organizations offer free services, so do your research.

You can also do your due diligence by checking with your state Attorney General or local consumer protection agency . You can also get a list of credit counseling agencies from the United States Trustee Program.

In many cases, you are required to visit a credit counselor from a government approved organization before you even consider bankruptcy options. That counselor will show you your options, which could range from a modified payment plan to debt consolidation.

Exploring Debt Settlement

This is essentially an act of forgiveness from your creditors, but it’s not as lovely as it sounds. Here you pay a lump sum, far below what you owe, to settle the matter.

The creditors take a loss, and so does your credit score . You’ll still need to pay taxes on the forgiven amount, because it will be considered revenue (money you’re getting back).

There are debt settlement companies out there, but not all of them are created equal—some of them charge very high fees and can’t guarantee they will get you the settlement that makes the most sense for you. You may want to consider consulting a tax expert before you consider this route.

Asset Liquidation

This essentially boils down to hard and fast cash. You can sell your car, jewelry, baseball card collection, even your home or your stocks and bonds.

Of course, in order to do this, you may need nerves of steel and an ability to suppress any emotional ties you have to the items you are selling out of panic. However, if the numbers add up, liquidating assets could do the trick as an alternative to bankruptcy options.

Cut Back on Expenses

You may want to give some deep thought to the way you live. Your lifestyle may be what inched you toward bankruptcy in the first place. A good way to start is to devise a budget, and to stick to it.

Even small steps, like making your own lunch, walking instead of burning gasoline, keeping the heat or air conditioning use to a minimum, and brewing your own coffee could set you on your way to freeing up money that can go toward paying your debt.

Writing down everything you spend can help you to understand where your money is going, and where it can be saved or rerouted. It can be tough to live on a budget at first, but with time, you may find yourself becoming more solvent and less burdened.

Become Judgment Proof

There are some people who own so few assets (if any, like a house or a car) or make such modest incomes that they are legally determined by federal and state courts to be “judgement proof .” That means that creditors may be limited in what they can seize in reaction to nonpayment of debt.

People with credit card debt actually have rather strong protections, in an effort to keep families from becoming destitute.

Four states—North Carolina, South Carolina, Pennsylvania and Texas—allow no wage income to be taken (garnished) as a result of credit card debt.

The U.S. Consumer Credit Protection Act states that, if your disposable income is $217.50 a week or less (that’s the leftover income after taxes, Social Security, and unemployment insurance or state retirement programs), it may not be seized. See a lawyer to find out if you qualify.

Refinance Your Mortgage

If your lender permits, you may be able to restructure your mortgage payments that could allow you extra cash to pay down your debts.

If you cannot directly renegotiate the mortgage with your lender, you may consider mortgage refinancing, which could offer a lower interest rate and a payback plan that you could live with.

Rethink Your Student Loans

Student loans are not often dismissed when you declare bankruptcy. In court, it’s on you to prove that the repayment of the debt will impose an undue hardship on you and your dependents. If you can successfully prove that your student loan is causing you the very hardship that will force you into bankruptcy, your loan could be canceled by the court .

However, don’t forget about lawyer fees and the time it will take to build a case for yourself. Usually, that involves a lot of paperwork.

Consider a Home Equity Loan

You can use the equity in your house to pay off creditors. Note that in the event that you don’t pay back your home equity loan, the lender can take your house, since the loan itself is secured by your house.

Debt Consolidation

Rather than deal with a network of hungry creditors, debt consolidation allows you to gather up all your debt into one loan and make one monthly payment.

Most credit cards charge you very high interest rates, making it nearly impossible to pay them off through monthly payments. Instead, consider a low, fixed-rate personal loan can take that high-interest debt off your hands and set you on a new track.

As you work to get your financial life on track, SoFi Money can be a great tool. It is a cash management account where you can spend and save in one place.

Ready to learn more? Opening a SoFi Money account is quick and easy. Get started now.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Neither SoFi nor its affiliates is a bank.
SoFi MoneyTM is offered through SoFi Securities LLC, member FINRA / SIPC .
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice about bankruptcy.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
SoFi Mortgages are not available in all states. Products and terms may vary from those advertised on this site. See for details.

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender