When I have represented parties in bankruptcies and workouts, they often raise common questions. This article offers my answers to some of those basic questions for people considering bankruptcy.

If you’re not going to declare bankruptcy and have several different kinds of debt, how do you prioritize which ones to pay off first?

High priorities are creditors who are likely to interfere with your life, including tax authorities, creditors with liens on your real property or personal property, creditors on which you rely for ongoing services (cell phone company) or goods (grocery store credit card), and creditors who are likely to sue you and then garnish wages or bank accounts.

If you are $100,000 in debt, what common mistakes make a bad situation worse?

The most common mistake I see people make when their debts exceed $100,000 is to engage in fraud. That is, they do little lies in an attempt to solve their cash flow problem, but these little lies often have major consequences (such as preventing discharge in bankruptcy). Other mistakes are borrowing from family to pay off debts, which merely shifts the debts from creditors you care nothing about to creditors you value deeply.

How should a person decide if bankruptcy is right for them?

Whether bankruptcy is right for a person depends on a few factors:

  1. Does the person qualify for bankruptcy (means test, etc.)? If yes, proceed.
  2. Does the person have at least $20,000 in debts that can be discharged in bankruptcy? If yes, proceed.
  3. Will the person lose anything, such as expensive assets, by filing for bankruptcy? If no, proceed.
  4. Has the person engaged in fraud or other illegal activity that will prevent bankruptcy? If no, then bankruptcy is a very good option to consider. Note that most bankruptcy attorneys will evaluate these issues during a free consultation, so the best advice is to meet with a bankruptcy attorney.

Are there any changes to this issue on the horizon? Any laws or regulatory reforms that could shift the landscape for heavily indebted individuals?

There are no expected changes to this area of the law that I would put much weight in.