Bankruptcy v. Doing Nothing

Should you file for bankruptcy to get rid of debts, or can you sit back and wait?

By , Attorney

If you're struggling with debt, filing for bankruptcy can be a good way to get your finances back on track. But not everyone needs to start a bankruptcy case right away. Whether you should file for bankruptcy or do nothing will depend on the following:

  • if you have anything creditors can take
  • whether you will erase most or all of your debt
  • if you can keep important property, and
  • the available alternatives to bankruptcy.

Ultimately, you'll want to assess whether you're vulnerable to creditors. In some cases, doing nothing, at least for now, might be the best option.



When You'll Want to Avoid Bankruptcy and Do Nothing

Everyone considering filing for bankruptcy will look at the same set of factors. Here's where you'll start.

Do You Have Anything Creditors Can Take?

Most creditors need to file and win a money judgment in court before they can take your property. If, however, you don't have anything a judgment creditor can collect, you're "judgment proof." You won't need to file for bankruptcy.

If you have assets and your creditor sues you, you find out what will happen in Creditor Lawsuits: What to Expect When the Case Is in Court.

When You're Judgment Proof and Should Do Nothing

Generally, you're judgment proof if:

  • You don't have any equity in real estate.
  • You don't own any assets you can't protect from creditors using a state exemption statute.
  • You aren't working or have a very low-paying job.
  • You receive an income source that's exempt from creditors, such as Social Security benefits and, in some states, unemployment and other public entitlement benefits.

Be Sure You're Permanently Judgment Proof

Being judgment proof can be a temporary situation. For instance, you might be out of a job now but employable in the future. If you're relatively sure your financial situation won't improve substantially, and if collection pressure doesn't bother you, there might not be a reason to file for bankruptcy.

Will Bankruptcy Wipe Out Your Debt?

Not all debts get discharged in bankruptcy. If you'll still have to pay your most worrisome bills after filing for bankruptcy, then filing probably won't be a good idea. On the other hand, if filing for bankruptcy gets rid of enough debt that you'll have more money to devote to nondischargeable debt, bankruptcy might still help.

Below are some debts that are either difficult or impossible to eliminate in bankruptcy. Also, creditors with these types of debt can use collection techniques like wage garnishments or bank levies even without a judgment.

Past Due Child Support

A Chapter 7 bankruptcy filing won't eliminate or reduce child support debt. So filing for Chapter 7 bankruptcy won't help unless you can free up future income you can use to pay your child support by discharging other debt.

A Chapter 13 bankruptcy case, however, can be a better option. You can stop collection actions by entering into a three- to five-year repayment plan to pay off your past-due support payments in full. Be aware that if you have a hefty outstanding balance, your monthly payment might be steep because you must pay off all of the arrearages in the plan. You'll still have to continue making your ongoing child support payment, as well.

If you can catch up in Chapter 13 bankruptcy, here are some of the complications you'll avoid:

  • wage garnishment
  • loss of unemployment compensation
  • jail time
  • offsets of federal or state income tax refunds
  • passport denial
  • offsets of state lottery winnings
  • driver's license suspension
  • reduction of workers compensation benefits, or
  • reduction of social security or disability benefits.

Find out more by reading What Are the Differences Between Chapter 7 and Chapter 13 Bankruptcy?

Past Due Income Taxes

Taxpayers with outstanding tax debts are subject to a levy on assets or other income sources. A levy is a legal seizure of your property to satisfy a debt. Once a levy is in place, it usually remains until you pay off your tax debt.

If you owe past-due income taxes and you do nothing, you could face the following:

  • losing state or federal tax refunds
  • a reduction in social security benefits
  • a wage garnishment (depending on the state in which you live), or
  • a lien against your real estate.

Understand that a bankruptcy filing won't eliminate recent tax debts. However, through a Chapter 13 case, you might be able to pay off the tax debt over a period of three to five years.

To find out when you can discharge tax debts, see Tax Debts in Chapter 7 Bankruptcy.

Student Loans

If you're in default on your student loans, the lender could result in a:

  • wage garnishment (depending on the state in which you live)
  • offset of federal and state income tax refunds
  • loss of eligibility for federal aid, including Pell grants
  • loss of deferment or forbearance options, or
  • reduction in Social Security income.

It's not easy to discharge student loan debt in bankruptcy. You must prove that paying your loans will cause an undue hardship, which is a tough standard to meet, although not impossible in every situation.

Are You at Risk of Losing Your Home or Car?

If bankruptcy can help you save your home or car, it might be a good choice for you.

How Chapter 13 Bankruptcy Can Help

If you're behind in your mortgage or car loan payments, you can catch up on those payments through Chapter 13 bankruptcy. You might also be able to get rid of second mortgages or home equity lines of credit or reduce your car loan to the market value of the car.

Learn more in Your Home and Mortgage in Chapter 13 Bankruptcy and Your Car in Chapter 13 Bankruptcy.

How Chapter 7 Bankruptcy Can Help

In Chapter 7 bankruptcy, you can't bring a loan payment current, but if you can get rid of other debts to free up money to pay your mortgage or car loan, it might be worthwhile to file. Keep in mind that to keep a house or car in this chapter, you'll want to be current on your payment when you file.

You'll find more information in Your Home in Chapter 7 Bankruptcy and Chapter 7 Bankruptcy and Your Car.

Do Nothing When You Have a Bankruptcy Alternative

Before you decide on filing for bankruptcy or doing absolutely nothing, consider other options for dealing with debts by reading Alternatives to Bankruptcy.

Meet With a Bankruptcy Lawyer

The easiest way to decide your best course is by speaking with a bankruptcy attorney. A bankruptcy professional will help you weigh and balance your needs and help you determine whether it would be more beneficial to file for Chapter 7 or 13 or explore another option.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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Helpful Bankruptcy Sites

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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