Does Bankruptcy Make Economic Sense?

If you can't wipe out enough debt, or if you have to sacrifice too much property, Chapter 7 may not be worthwhile.

If you are inclined to file for Chapter 7 bankruptcy, take a moment to consider the following questions:

Will bankruptcy discharge enough of your debts?

Certain categories of debts cannot be discharged in Chapter 7 bankruptcy. These are called nondischargeable debts, and it doesn't make much sense to file for Chapter 7 bankruptcy if your primary goal is to get rid of them. The main ones are:

• back child support and alimony obligations, and debts considered in the nature of support

• student loans, unless repayment would cause you undue hardship

• income taxes less than three years past due, and

• court judgments for injuries or death to someone arising from your intoxicated driving.

The bankruptcy judge may rule any of the following debts nondischargeable if the creditor objects in the bankruptcy court:

• debts incurred on the basis of fraud, such as lying on a credit application or writing a bad check

• debts from willful or malicious injury to another or another's property

• debts from larceny (theft), breach of trust or embezzlement, or

• debts arising out of a marital settlement agreement or divorce decree that aren't otherwise automatically non dischargeable as support or alimony.

If the bulk of your indebtedness is from debts that are nondischargeable only if the creditor files an objection with the court, it may still make sense to file for bankruptcy and hope your creditors don't object.

How much property will you have to give up?

Whether or not you decide to file for bankruptcy may depend on what property will be taken to pay your creditors (nonexempt property) and what property you will keep (exempt property).

Certain kinds of property are exempt in almost every state, while others are almost never exempt. The following are items you can typically keep (exempt property):

• motor vehicles, to a certain value
• reasonably necessary clothing (no mink coats)
• reasonably needed household furnishings and goods (the second TV may have to go)
• household appliances
• jewelry, to a certain value
• personal effects
• life insurance (cash or loan value, or proceeds), to a certain value
• pensions
• part of the equity in your home
• tools of your trade or profession, to a certain value
• portion of unpaid but earned wages, and
• public benefits (welfare, Social Security, unemployment compensation) accumulated in a bank account.

Items you must typically give up (nonexempt property) include:

• expensive musical instruments (unless you're a professional musician)
• stamp, coin and other collections
• family heirlooms
• cash, bank accounts, stocks, bonds and other investments
• second car or truck, and
• second or vacation home.