Bankruptcy is meant to provide debtors a “clean financial slate.” By wiping away many of a debtor’s financial obligations, bankruptcy courts hope that the debtor would be able to move on with his or her life and develop new, responsible financial habits. Unfortunately, this does not always happen. In fact, unless a debtor receives and implements financial tools that help him or her address the underlying cause of the bankruptcy, it is not unusual for the debtor to find him- or herself in dire financial straights several years after bankruptcy. Unfortunately, if this occurs the debtor may find that his or her options for resolving his or her new debt may be even smaller than before.
An Overview of the Bankruptcy Process
Individual consumers who find themselves unable to pay back all of or part of their debts may file for Chapter 7 or Chapter 13 bankruptcy protection. In a Chapter 7 bankruptcy, the debtor’s eligible debts are discharged, or wiped clean, and the debtor is no longer obligated to pay these debts back. In a Chapter 13 bankruptcy, the debtor pays a portion of his or her income to a bankruptcy trustee for three to five years. This money is then distributed to the debtor’s creditors. Once the debtor has paid a sufficient sum of money over the course of the three-to-five-year period, the remaining eligible debts are discharged.
How Bankruptcy Can Limit Your Future Options
When you attempt to settle a debt through consolidation or settlement agreements, the willingness of the creditors to agree to your plan will depend on many factors. Chief among these factors are the type of debt involved (whether it would be dischargeable in a bankruptcy proceeding) and whether there is a strong chance you would file for bankruptcy if the settlement or consolidation agreement is not accepted. Many creditors would prefer to give you additional time to pay the amount back or accept a portion of the obligation rather than receive nothing at all. (Most unsecured creditors receive nothing from the debtor in a bankruptcy proceeding.) Therefore, when you are on the verge of bankruptcy, you have a great deal of leverage to use in settling or consolidating your debt: If a creditor is reluctant to accept a settlement offer, for example, you simply mention that your other alternative is to file for bankruptcy. See the article in Forbes that discusses different solutions to your debt crisis.
So why, then, does a past bankruptcy reduce your leverage in settling or consolidating your debts? Wouldn’t a past bankruptcy show you are not financially responsible and likely to completely default on your obligations? If you filed for Chapter 7 bankruptcy, you must wait eight years from the date you filed your previous case before you may file for Chapter 7 again. If you are wanting to file for Chapter 7 and had previously filed for Chapter 13 bankruptcy, you must wait six years from the date you filed your previous bankruptcy petition before you can file for Chapter 7. There are other time limitations that are applicable if you previously filed for Chapter 7 and wished to file for Chapter 13 or if you filed for bankruptcy, but your petition was dismissed. Suffice it to say that you may have a waiting period before you are eligible to refile for bankruptcy.
Creditors who are aware that you are not able to file for bankruptcy for several years may be less inclined to settle or consolidate your debt. This is because they know they would have several years in which they could attempt to collect the full amount of the obligation before you would be able to avail yourself of the protection of the bankruptcy courts again. Does bankruptcy hurt debt settlement? Find out by contacting one of our attorneys directly.