Can I File Bankruptcy if I'm Not Late on My Payments?

By Tom Streissguth

If a financial storm is brewing, you have the option to file for bankruptcy protection. The federal bankruptcy code allows individuals, couples and businesses to go through this process in order to discharge debts and get a financial fresh start, if absolutely necessary. The bankruptcy laws, and a sweeping bankruptcy reform passed by the government in 2005, govern who may file for bankruptcy.

Chapter 7 and Chapter 13

For individuals and couples, bankruptcy comes in two basic varieties: Chapter 7 and Chapter 13. In a Chapter 7 process, you submit your non-exempt assets to a court trustee who sells them in order to pay your creditors. Your debts are discharged, i.e. canceled, at the end of the process, unless federal law makes them "nondischargeable." A Chapter 13 bankruptcy allows you to partially repay your creditors over a span of three to five years. A trustee draws up the plan and collects your payments; at the end of the process, if you've kept up the payments, your outstanding debts are discharged. Both forms of bankruptcy protect you from lawsuits and collection actions by your creditors until the court issues the discharge.

Who May File?

Federal law sets forth the rules for who may file for bankruptcy protection. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides that individuals or families with median earnings above the average in their state of residence are subject to a means test. This applies only to bankruptcy filers with primarily consumer debt, in most cases credit card debt. The means test takes into account allowed deductions, such as living and educational expenses. If a Chapter 7 bankruptcy filer is found to exceed the means-test guidelines, the court may dismiss the case or convert it to a Chapter 13.

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Account Status

The bankruptcy law does not refer to the status of your credit accounts, whether they're current, late, in collections or written off by the creditor. Many people file for bankruptcy even if they are current on their accounts, but facing circumstances, such as a divorce or sudden medical expenses, that will prevent them from making payments in the future. The court pays attention only to a filer's income and allowed deductions from that income in applying median income standards and the means test.


Filing for bankruptcy while not in default on loans or behind on credit cards may benefit your credit score in the long run. Late payments on accounts that are allowed to accumulate over a long period of time will cause severe damage to your score and take longer to overcome than a bankruptcy filing while you're still current. Once the bankruptcy is discharged, a good record of repayments will gradually return the credit score to health, despite the bankruptcy flag - which remains on your report for a minimum of ten years — and much more quickly than if you have multiple late payments showing. Many bankruptcy attorneys recommend filing for bankruptcy before you drain savings and retirement accounts to pay debts that will ultimately prove impossible to repay.

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Negative Effects of Chapter 13 Bankruptcy for an Applicant


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Who Is a Good Candidate for Bankruptcy?

If you are facing debts that would take more than five years to pay off, have assets at risk such as a house facing foreclosure, or cannot cover your daily expenses and pay off debts with your present income, you may be a good candidate for bankruptcy. However, exemption limitations and negative effects on some careers and credit records mean bankruptcy is not appropriate for some people, even if they have overwhelming debts.

Does Chapter 7 Cover Student Loans?

If you are overwhelmed by student loan debt, you may consider filing for bankruptcy. There are two different types of student loans: private and federal loans. Federal student loans are backed by the federal government and offer a fixed interest rate. Banks and other financials institutions issue private loans, and interest rates on these loans are typically much higher than federal loans. While filing for bankruptcy may seem like a good option, it can be very difficult to discharge your student loan debt in bankruptcy and will require a showing that the student loan constitutes an undue burden.

Does It Matter if You File Bankruptcy Before or After Your Credit Cards Go to Collections?

In tough economic times, many Americans find it difficult to make all of their debt payments on time. Some consumers may seek relief through bankruptcy, a legal process that temporarily halts collection activity and discharges the majority of consumer debts. If you are considering bankruptcy to clear mounting credit card bills, you may not realize there are specific guidelines for this type of debt. Through proper timing, you can ensure all credit card debt is included in the proceedings, and at the same time, minimize the negative impact of bankruptcy on your personal credit.


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