When Bankruptcy Is Not the Best Option

There are a lot of reasons to file bankruptcy. Bankruptcy can be used to discharge debt and get a fresh start. It can be used to protect a home from foreclosure or stop repossession of a car. You can also file bankruptcy to stop a lawsuit, prevent a bank account from being levied, and in Texas you may be able to file bankruptcy in order to lift the suspension of your driver’s license. Sometimes bankruptcy is not the best option. The most common situations in which I advise debtors not to file bankruptcy involve debtors with too little debt or primarily student loans.

Debt can be a stressful thing. When the creditors are calling and the debtor is having difficulty making payments, a relatively small amount of credit card debt may seem insurmountable, but in the scheme of things it is a manageable problem. After reviewing this type of problem I can usually point out how minor changes to a budget allow the debt to be repaid in a short amount of time. I prefer to avoid filing bankruptcy in these types of cases because I feel that they aren’t in my client’s best interest.

I also prefer not to file bankruptcy cases when the debt is primarily student loans. Student loans are not usually dischargeable in bankruptcy so filing a Chapter 7 bankruptcy has no effect. A Chapter 13 bankruptcy case will cause repayment of the debt to be postponed until after the bankruptcy case is finished, which will provide temporary relief to the debtor. But there is a problem with filing bankruptcy to postpone repayment of the debt. The debt continues to accrue interest while the debtor is in the bankruptcy case, so once they have to start repaying the student loans the payments are higher than before the bankruptcy case was filed. Debtors are much better off if they can find a way to make at least partial payments so that the interest isn’t compounding.