How to File for Bankruptcy
If you’re overwhelmed by debt, bankruptcy may be a financial tool that gives you a fresh start. Filing for bankruptcy stops debt collection calls, wage garnishment, and debt lawsuits. It may also give you the opportunity to wipe your slate clean by discharging your outstanding balances.
But it won’t solve all your financial problems. Obligations like alimony and child support won’t be included, and your chances of getting your federal student loans eliminated are slim. You’ll also take a major hit on your credit.
Here’s what you need to know about filing for bankruptcy.
What is bankruptcy?
Bankruptcy is a legal means for reducing or eliminating debt an individual or business is unable to repay. There are many types of bankruptcy, but the common thread is that it gives people the chance to start over after their finances have completely collapsed.
The primary downside of filing for bankruptcy is that it quickly tanks your credit and remains on your credit report for up to 10 years. But if you’re already delinquent on your accounts, your credit is already suffering and may receive a needed boost as it starts to recover.
Types of bankruptcy: Chapter 7 vs. Chapter 13
There are several types of bankruptcy, but the most common are Chapter 7 and Chapter 13. Here’s a breakdown of these two bankruptcy types.
Chapter 7 bankruptcy
Chapter 7 bankruptcy releases individuals and married couples from unsecured debt responsibilities — like medical bills and credit card debt — while still maintaining key assets. It’s the fastest form of bankruptcy and is often referred to as liquidation.
During liquidation, your possessions are sold and the funds are used to repay your outstanding balances. However, property like your home, car and retirement savings are considered exempt and, therefore, safe from bankruptcy proceedings.
You must pass the bankruptcy means test to be eligible for Chapter 7. The means test looks at your full financial picture to determine whether you have enough disposable income to cover your debt.
Chapter 13 bankruptcy
Chapter 13 bankruptcy restructures your debt into a three or five-year payment plan in exchange for having some of your debt forgiven.
If you don’t qualify for Chapter 7 or if you want to retain certain assets or secured debt — like a mortgage — you may prefer filing under Chapter 13.
Other types of bankruptcy
There are several other types of bankruptcy that primarily apply to entities, like businesses and corporations.
Chapter 9 bankruptcy. This type of bankruptcy is designed for cities or towns that need protection from creditors while developing a plan to address its debt.
Chapter 11 bankruptcy. Sometimes called reorganization bankruptcy, this option is usually used by businesses and corporations that want to continue operations.
Chapter 12 bankruptcy. Those who receive regular income as a farmer or fisherman may file under Chapter 12 to give themselves up to five years to repay all or part of their debt.
Chapter 15 bankruptcy. This type of bankruptcy only applies to businesses with assets and debt domestically, and in other countries.
How to file for bankruptcy
You can choose to file for bankruptcy on your own or with an attorney, but keep in mind that bankruptcy is a legal process that’s often confusing and complex.
Gather your financial records. List your assets, debt, expenses, and all sources of income.
Receive credit counseling within 180 days of filing. You’re required to undergo credit counseling from an approved provider. You must include your certificate of completion in your bankruptcy paperwork or your case will be rejected.
File your petition for bankruptcy. You’ll include all bankruptcy forms and schedules. You’ll also pay a filing fee at the same time or apply for a fee waiver.
Attend a meeting with your creditors. Your bankruptcy case is assigned a court trustee who will set up a mandatory meeting with your creditors. However, your creditors aren’t required to show up, but it provides an opportunity for each of them to ask questions about the case.
Complete a debtor education course. If you don’t submit your certificate of completion, you risk the court closing your case without a discharge.
Get your discharge decision. The court will order that your debt be discharged, and you’ll no longer be legally required to pay them.
How much does it cost to file bankruptcy?
Filing for bankruptcy isn’t free. You’ll likely have attorney fees which vary across the country and add up quickly.
You’re also responsible for covering filing fees regardless of whether you have someone representing you. Let’s look at the costs for Chapter 7 vs Chapter 13 bankruptcy.
Keep in mind that you’ll also need to pay for attorney fees, which vary across the country and can quickly add up.
Bankruptcy alternatives
You should only use bankruptcy as a last resort. Start by exploring these alternative options to help get your finances in order without impacting your credit as much as bankruptcy.
Debt negotiation or settlement. Speak with your creditors and attempt to negotiate your outstanding balance with a lump sum or a more favorable payment plan.
Debt consolidation. You may be able to find a credit line or loan that pays off your current debt and either lowers your monthly payment or reduces your overall interest.
Sell your assets. Raise cash to pay your debt by selling your possessions.
Filing for bankruptcy can save you from a mountain full of debt, but it should be used strategically and only as a final solution.