If you are dealing with an insurmountable amount of debt and feel like bankruptcy is your only option, check to see if you qualify for other debt relief options.
United States bankruptcy laws offer a fresh start to overwhelmed debtors. Bankruptcy can help you wipe out debt through discharge, create viable debt repayment plans or alter the terms of your debt.
Bankruptcy is a federal protection that helps people and businesses that can’t pay their debts. This can include debts such as medical bills, personal loans and credit cards.
Most individuals who file bankruptcy choose between Chapter 7 (liquidation) bankruptcy and Chapter 13 (repayment) bankruptcy. The type of bankruptcy you file influences whether you need to sell your assets or make payments. It may also influence how much of your debt gets canceled.
Though some may shudder at the idea of filing for bankruptcy, it can bring much-needed financial relief and a fresh start for consumers.
That being said, filing bankruptcy is a serious decision that requires a lot of thought. Read on to learn what happens when you file bankruptcy.
Bankruptcy won’t always be the right choice. To discharge your debts through bankruptcy — which means your debts will be forgiven — you must prove that you can’t make the payments to your creditors.
As a result, people with high incomes may not get the debt relief they want through bankruptcy. Instead, they may have to file a form of bankruptcy that allows them to restructure their debts, making it easier for them to make payments but not erasing the debts altogether.
Bankruptcy won’t work if you’ve recently received a bankruptcy discharge. Legally, you cannot receive a Chapter 7 discharge if you’ve received another Chapter 7 discharge in the last eight years or a Chapter 13 discharge in the past six years. (Technically, you can file before six years if your total payments account for 100% of unsecured debt claims in your Chapter 13 bankruptcy.)
Likewise, you cannot receive a Chapter 13 discharge if you’ve received a Chapter 7 discharge in the last four years or a Chapter 13 discharge in the last two years.
Even if you legally qualify to file bankruptcy, filing could be a waste of resources. Some people are known as “judgment-proof,” so bankruptcy may not be a good fit for them.
For example, a person with minimal assets and no income except for Social Security Income doesn’t have collectible assets. Social Security Income cannot be garnished to repay delinquent debts, leaving the person with no seizable assets. In that situation, filing bankruptcy may not be a wise decision since their debts aren’t collectible.
Instead of filing bankruptcy, one solution can be to open a bank account exclusively for Social Security Income, which protects it from creditors. Then you can send a cease communication letter to stop collectors from calling.
A credit counselor can help you build a budget and may be able to help you lower interest rates on your existing debts. Credit counselors may track your expenses for at least 30 days so they can identify discretionary income.
Additionally, they teach clients to comparison shop and negotiate rates to lower their fixed expenses. These simple actions can help some clients avoid bankruptcy.
Chapter 7 bankruptcy is the most common form of bankruptcy. In 2021, 70% of all nonbusiness bankruptcy filings were Chapter 7, according to the Administrative Office of the U.S. Courts.
Sometimes referred to as liquidation bankruptcy, Chapter 7 may require debtors to sell their valuable possessions to repay some of their debts. However, this is not always the case.
Chapter 7 can be split into two categories:
Chapter 7 bankruptcy can remain on your credit report for up to 10 years from the date you filed.
Chapter 13 bankruptcy is the second most common form of bankruptcy. Referred to as the “wage earner’s plan” by the U.S. Courts, this form of bankruptcy requires debtors to submit to a three-to-five-year payment plan rather than liquidate their assets.
This plan may be viewed more favorably than Chapter 7 bankruptcy because the debtor is paying off at least a portion of their debt instead of having it all discharged.
Chapter 13 can stay on your credit report for up to seven years, beginning on your filing date.
Though typically reserved for businesses, debtors who don’t qualify for Chapter 13 bankruptcy may instead qualify for Chapter 11.
Chapter 11 bankruptcy allows you to reorganize your debt, though this plan may also require you to sell assets to repay some of your debts.
A lawyer can help you decide between Chapter 7 and Chapter 13 bankruptcy. They will also answer your questions and file all the necessary forms for you. Given the complexity of the bankruptcy process, we strongly recommend consulting a bankruptcy attorney. However, if you want to file for bankruptcy on your own, here’s what you need to do:
Filing bankruptcy requires you to submit a flurry of documents right off the bat:
Consumers filing for Chapter 13 bankruptcy must submit a repayment plan with their petition. You can also expect to pay a $235 case filing fee and a $75 miscellaneous administrative fee.
For those filing for Chapter 7 bankruptcy, you will pay $245 to file, $75 in miscellaneous fees and a $15 trustee surcharge at the time of filing.
Filing your bankruptcy petition automatically stops most (but not all) collections actions against you. You should not make any regular payments during this time. However, if you’re filing Chapter 13 bankruptcy, you must start making the payments outlined in your monthly plan within 30 days of filing, even if the plan hasn’t been approved yet.
In both Chapter 7 and Chapter 13 bankruptcy, the courts appoint a bankruptcy trustee to your case. The job of the trustee is to work with both you and your creditors in an impartial manner. The trustee will be in charge of liquidating your estate and disbursing the funds in Chapter 7 bankruptcy, or receiving and distributing funds in Chapter 13 bankruptcy.
Your case trustee will set up a meeting with you and your creditors within 21 to 50 days after you file. You must attend the meeting and answer all questions.
Following the meeting of the creditors, your bankruptcy trustee may begin selling assets and paying your creditors. The trustee will only sell assets that aren’t exempt by federal law.
If you want to keep your house or car, you may have the opportunity to reaffirm your debt on secured property by agreeing to make payments on the loan as agreed. You must reaffirm all loans before your property is discharged.
After the meeting of creditors, a bankruptcy judge will hold a hearing to decide whether you can realistically meet the payment obligations in your plan. They will also confirm that the plan meets the standards required by law. If the judge believes your plan is workable and meets the requirements, they will confirm it. You will continue to make payments to your trustee, a process that will last three to five years.
The last step in bankruptcy is discharge. This means that your remaining debts are canceled and cannot be collected. You will owe income tax on the amount of money discharged, so be sure to set aside some money for that purpose.
If bankruptcy doesn’t make sense for you, there are other options for lowering your debt burden:
Bankruptcy will cause your credit score to drop. Because bankruptcy can stay on your credit report for up to seven (Chapter 13) to 10 years (Chapter 7), it can also make it challenging to qualify for future credit opportunities.
Bankruptcy may also require that you forfeit some of your valuables, and you’ll have to pay attorney and administrative fees.
While many of your debts can be discharged in bankruptcy, there are some important exceptions. You may not be able to discharge the following types of debts:
If your vehicle doesn’t fall under the federal or your state’s exemption laws, it’s possible that you could lose your vehicle during bankruptcy. Another thing to consider is that because auto loans are typically secured loans, if you fall behind on payments, the lender can seize your collateral — your vehicle.
While you can’t apply for a credit card during your bankruptcy proceedings, you can apply for one not long after your debts are discharged. However, keep in mind that you may be charged higher interest rates since your credit score may have taken a significant hit.
While you can get a mortgage after you’ve filed for bankruptcy, you may have to wait several years before you can apply for one, depending on the type of loan you’re pursuing.
When it comes to conventional loans, you’ll need to wait at least four years after filing for Chapter 7 and two years after filing for Chapter 13 bankruptcy.