Dear Bankruptcy Adviser, 

My employer cut my hours in half. This has caused my bills to become late or unpaid. I am trying to reorganize my expenses until I find another job. I can afford my mortgage but not my other bills. Should I file bankruptcy to protect my home? 

-- Ivy

Dear Ivy, I am going to make two assumptions regarding your question so that I can address an important issue you bring up. One, I will assume you want to file a Chapter 7 bankruptcy in which you wipe out most or all the debt but keep your assets -- house, cars, retirement, personal property, etc. Two, I will assume you can protect your home if you do elect to file Chapter 7. This means you have no equity in your property or only the amount you can protect when filing Chapter 7 bankruptcy.

Making these two assumptions is important because it regards the issue of timing a bankruptcy filing. Many times, I will consult with a prospective client who has just returned to work. He has a lot of debt, most of it in collections, but is now making a good living again.

Had this individual filed a Chapter 7 bankruptcy when his income was low, the case would have likely been closed and the debts discharged prior to starting the new job. That means all the income from the new job could go toward rebuilding credit and starting over.

Unfortunately, timing is everything. Quite often, if one is working again and he files, income may be too high, and the court will feel that the individual can now pay back some or all the debt. I know most people believe that is only fair. You incurred the debt, so you should pay it back. In general, I agree, but that debt usually has increased at interest rates as high as 30%. This means what could originally have been only $3,000 could have nearly doubled by the time the case is filed.

Right now, you are able to afford your mortgage but not your other debts, which could include credit cards. If you file now, you could wipe out your debt, keep your home, and rebuild your credit and savings when you start working more.

Waiting to file could mean your recovery from bankruptcy will be years away and, in my opinion, fewer people benefit from that approach.

Good luck.

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