If You’re Sued For A Debt, Should You File For Bankruptcy?

For many people, the thought of bankruptcy doesn’t come into their minds until they get sued for a debt that they owe. But many people in this situation have one question: should they file for bankruptcy, or should they just find an attorney and try to defend against the creditors suing them?

Of course the answer is largely based on your individual situation. A good bankruptcy or consumer attorney can analyze your specific situation. But there are some general considerations you can think about when making this choice.

One Creditor or More?

The first thing to ask is how many creditors do you really have? If the creditor suing you is the only creditor, you may be better off just defending the lawsuit, and hoping to win, or come to an agreeable settlement.

But if you have a lot of debt, with multiple creditors, you may be wasting your money. What’s the point of paying to fight one creditor, or negotiating a settlement and paying it, when at any time, your other creditors could just file lawsuits against you? With multiple creditors, you may be better served just filing for bankruptcy, and wiping out all your creditors at once.

Can You Defend The Suit?

Another thing to consider is how defensible the lawsuit filed against you is. In many cases, creditors can’t prove they own the debt, or they can’t prove how much you owe them. They may not have all the paperwork that they need to prove their case in court. They may not have properly calculated your prior payments, and in some cases, the debt may not have ever even been yours to begin with (identity theft does happen).

If your collection case is highly defendable, you may be better served fighting the case. Of course, if it looks like the creditor may have a solid case, and winning would be a long shot, bankruptcy may be the better option for you, especially if the amount you are being sued for is high.

How Much is the Debt?

The amount of the debt matters also. If you are being sued for $5,000, and you could pay, for example, $2,000, you may be better off fighting the case and trying to revolve the debt.

But the debt may be so high you can’t ever pay it. If you owe $50,000, and you can’t pay anything, bankruptcy in that case would probably be the better option, as there is no realistic chance at settling the case for an amount that you can pay.

Tax Considerations

Remember one other thing: The IRS may consider any debt that is forgiven by the creditor, as taxable income. But that doesn’t happen in bankruptcy; discharged debt in a bankruptcy is not taxable.

If the debt is high enough that it would cause a big tax obligation even if all or part of the debt was excused, you may be better off just filing for bankruptcy, and avoiding those tax problems.

Ask us about your debt and bankruptcy related questions. Contact the Boca Raton bankruptcy attorneys at the Law Offices of Stephen Orchard at 561-455-7961 today.

Source:

irs.gov/taxtopics/tc431