Can You File Bankruptcy on Collection Accounts?
Being put in collection is never a pleasant experience. There are many reasons why people get behind on their bills, including job loss, unexpected expenses, health issues, and more. These challenges may be beyond your control, but that doesn’t stop the bill collectors from calling nonstop. They may even call while you’re at work, threaten to repossess your vehicle, or bombard you with past-due notices. Not surprisingly, collection attempts often lead people to consider bankruptcy as a way to address debts they simply can’t pay.
Can You File Bankruptcy on Collection Accounts?
This depends on what kind of debt you have in collection, but in many instances, yes. Let’s look at the bankruptcy process and what is and isn’t typically resolved in a bankruptcy proceeding.
What is Bankruptcy?
Bankruptcy allows you to discharge, or be relieved of the responsibility to pay, many of your debts. When you file for bankruptcy, you’re essentially saying you can’t pay your outstanding bills and seeking relief from the court. However, not all types of debt are dischargeable, and some are only dischargeable in limited circumstances. First, let’s look at debts that can usually be discharged in a bankruptcy filing:
- Credit card debt.
- Collection agency accounts (unless they are collecting on non-dischargeable debt).
- Medical bills (these are a factor in about two-thirds of bankruptcies).
- Personal loans from family, friends, or acquaintances.
- Past-due utility bills (future bills will not be included).
- Bounced checks (unless they were written fraudulently).
- Repossession deficiency balances (the remaining amount you owe after a vehicle is repossessed and sold to cover your debt).
- Car accident claims (except for drunk driving crashes).
- Business-related debt.
- Past due rent (again, this doesn’t include future rent bills, only the past due amount).
- Judgments found against you in civil court (again, unless these involve fraud).
- Revolving credit accounts.
- Overpayments from social security or veteran’s assistance programs.
With each of these, there may be some exceptions. Your bankruptcy attorney will go over all your debts with you and let you know of any that are unlikely to be discharged.
There are also some types of debt that usually aren’t discharged:
- Student loans. In some cases, these can be discharged if you show that paying them causes “undue hardship,” but proving it can be difficult. Likely, you will not be able to get out of paying your student loans back.
- Government and tax debt. Occasionally you can remove these if they are very old, but you will usually have to pay your back taxes even after bankruptcy.
- Restitution. If you’ve been ordered by the court to pay restitution for a criminal offense, you will need to continue doing so regardless of your bankruptcy.
- Unpaid child support and alimony, as well as any debt or legal fees you were ordered to pay in a divorce. Bankruptcy will not end your obligation to pay these as ordered.
- Property liens. You may be relieved of paying a debt you owe for a property like a home or vehicle. But the creditor will have the right to seize the asset and resell it to recoup at least some of the money they lost when your debt was cleared. Although essential assets like a home or car are usually exempt from liquidation in a Chapter 7 bankruptcy, you will have to “reaffirm” that debt and keep paying it to keep the asset.
Bankruptcy or Pay Off Collections – Which Is Better?
The answer varies from case to case and with your individual financial goals. Some people ultimately decide that bankruptcy is the right decision for them. However, it isn’t the only option, and we encourage clients to consider the alternatives before making up their mind. It’s also important to remember the downsides of bankruptcy:
- Depending on your current credit score, you could lose anywhere from 130 to 200 points due to bankruptcy. Public records of your bankruptcy will remain on your credit report for seven or ten years, depending on the type of bankruptcy you choose, so your ability to get credit at a good interest rate may be affected for a long time.
- If most of your debt is non-dischargeable, bankruptcy may be less helpful for your situation (although a Chapter 13 filing may allow you to get a lower monthly payment).
- If you can’t continue paying on essential assets like your home or car, you may lose them, even in a Chapter 13 filing that avoids liquidation.
How to Get Out of Debt Without Bankruptcy
If you want to consider alternatives, your lawyer will review them with you. The most common option is to work things out with your creditors directly and make a repayment plan. If you file for bankruptcy, the court will do this for you, and you and your creditors will have little say in the terms. Your creditors may only get some of their debt repaid in bankruptcy, or in some cases, none at all. For this reason, it’s in their best interest to work out a payment plan with you directly. However, it can be daunting to attempt negotiations with someone who’s constantly calling and threatening to repossess your stuff. Additionally, it’s easier to negotiate when you’re familiar with bankruptcy and financial laws. For the average person, knowing where to start or what you should even ask or offer a creditor is difficult.
This is where your bankruptcy lawyer comes in. Your attorney can negotiate with creditors for you, reminding them of what they stand to lose if you go bankrupt and offering a payment plan that will work with your income. In some cases, your lawyer may also be able to consolidate debt. Or they may convince some bill collectors to waive late fees and other charges that will make it even harder for you to pay them back.
Paying off collections may be a good alternative for some people struggling with debt, but it isn’t right for everyone. In some situations, you may have far too much debt and too little income for a payment plan to be feasible. In this case, you might want to reconsider bankruptcy after talking to your attorney.
New Mexico Financial and Family Law: Talk to a Bankruptcy Attorney Today
Figuring out what to do about a stack of past-due bills can be scary, especially if you don’t happen to be an expert on how bankruptcies work. It’s hard when you don’t know which bill to pay, if you should look into bankruptcy, or the options for resolving your debt.
At New Mexico Financial and Family Law, we know how challenging these situations can be, and we want to relieve as much stress as possible. We’re happy to answer your questions and assist you with whatever you decide to do, whether it’s filing for bankruptcy or attempting to make a repayment plan with creditors. Our attorneys are experienced and knowledgeable about financial law in New Mexico and ready to help you start resolving your debt. Call us today at (505) 503-1637.