Filing for bankruptcy can be a life-changing decision and it’s not one that should be taken lightly. It’s important to weigh all of your debt relief options first, because in many cases, there may be a less extreme way to get out of debt. If your finances are spiraling out of control, find out what bankruptcy really entails and if it is the best course of action for you.
What Is Bankruptcy?
Often seen as an option of last resort, the goal of bankruptcy is to give you a fresh start from unmanageable debt. It is a legal process that could help clear away some or all of your financial obligations or allow you to repay it under different terms from your original agreements with your creditors.
Many consumer debts are dischargeable, which means that the debt could be forgiven or renegotiated if you qualify for bankruptcy. Debts that qualify for bankruptcy include:
- Credit card and personal loan debt
- Medical bills
- Collection account debt
- Business debts
- Utility bills
- Auto accident claims
If you decide to file, the bankruptcy court will first review your case in detail. They will assess all of your debts, liabilities, and assets to determine if you qualify. Then, depending on the type of bankruptcy you are eligible for, some of your non-exempt property, or assets that can be sold, may be used as repayment towards your outstanding liabilities.
Generally, anyone can file for bankruptcy, but depending on your income, assets, and if you have filed for bankruptcy before, your options could vary. However, most tax debts, child support, and spousal support will still need to be paid. There are two types of bankruptcy that consumers generally file.
Chapter 7 vs. Chapter 13
There are two types of personal bankruptcy options:
Chapter 7, also known as liquidation bankruptcy, is usually what people think of when someone mentions bankruptcy. There is no debt minimum or maximum to file for Chapter 7, but you must first pass a “means test”. This is conducted to exclude people who have high incomes or sizable assets. Many people excluded from Chapter 7 qualify for Chapter 13 instead.
If you meet the income requirements and qualify for Chapter 7 bankruptcy, a court-appointed trustee will appraise your non-exempt assets, such as your home, car, and investments and determine their market value. Then, they will sell off your assets and use the money to wipe out the majority of your financial obligations to your creditors. The entire process takes approximately three to six months, after which your qualified debt is cleared and no additional payments need to be made.
Chapter 13, also called the wage earner’s bankruptcy, is the standard option when you have a steady income and make too much money to qualify for Chapter 7. Instead of having your debt discharged, you’ll restructure your debt to be repaid over a three to five year period. There is no debt minimum for bankruptcy, but your secured debt must not exceed $1,184,200 and your unsecured debt must not exceed $394,725.
Unlike Chapter 7 bankruptcy, you may also include overdue mortgage payments on your repayment plan to avoid foreclosure. The length of your plan and the amount you’ll have to repay largely depends on your income and the value of your non-exempt property. You’ll make monthly payments to settle as much of your unsecured debt as possible with what you currently earn. The benefit is that you get to keep your valuable assets as long as you stick to the proposed plan. Once the payment plan is complete, your qualified debts will be considered paid off.
When figuring out which type of bankruptcy to file, you’ll need to consider your ability to repay your debts and whether you have property that you wish to keep. Chapter 7 bankruptcy generally discharges debts, but your assets will be liquidated. Chapter 13 bankruptcy could be a better option if you have a steady income and want to hold on to your assets]. To determine which of these options is right for you, seek legal advice from a bankruptcy lawyer.
How to File for Bankruptcy
Even if you’ve determined bankruptcy is the right solution for you, it is not a simple process. And it’s not free, either. Filing costs money, as does hiring an attorney. While you are not required to hire an attorney, it is typically advised.
No matter if you go it alone or work with an attorney, here are the steps to file for bankruptcy:
1. Assemble your financial information
You will need to include all of your debts, income, expenses, and assets. The court-appointed trustee may request additional documentation to better understand or verify the amounts you claim, so keep your records handy.
2. Undergo credit counseling
When you file for bankruptcy, you are required to take a bankruptcy course through an approved credit counseling agency. You are in charge of finding this agency on your own, and you will need to provide proof that you have received credit counseling when you file. This type of counseling will often take an hour or two and is frequently conducted online or over the phone.
3. File your petition
After taking a bankruptcy course, you need to fill out the necessary bankruptcy petitions and submit them to your local bankruptcy court. After your petition has been accepted, your creditors will receive a notice that you have included their debt in your bankruptcy filing. An automatic stay will be placed to prohibit your creditors from making further collection attempts.
4. Attend the 341 hearing
Approximately three to six weeks after your filing, the trustee will set up a meeting, or 341 hearing, for your creditors. Your lenders are not required to attend, but you are. During this meeting, they will have the opportunity to question you or the trustee. You will then confirm whether you wish to move forward with the bankruptcy proceeding.
5. Address formal objections
Once your creditors have had the chance to question you and review your repayment plan, they may object to a discharge of a particular debt based on when or how you took on the debt. After the objection is filed, you will have an opportunity to respond to it, and both sides may present evidence as to why the debt should be discharged or not. If there are no objections, your bankruptcy petition may proceed.
6. Repay your creditors
In a Chapter 7 bankruptcy, the next step is liquidation of your assets. The trustee will pay your creditors from the proceeds before the remainder of your debt will be discharged. In a Chapter 13 bankruptcy, a judge will approve your repayment plan at a confirmation hearing. After completing the plan, the rest of your qualified debt will be cleared.
7. Undergo post-bankruptcy credit counseling
Once you have had your 341 hearing (Chapter 7) or are about to make your last debt repayment (Chapter 13), you will need to attend post-bankruptcy credit counseling. If you do not provide confirmation to the trustee that you have completed this, your debts cannot be discharged and the bankruptcy process cannot be finalized.
Note: You cannot successively declare bankruptcy within a short period of time. The length of time between bankruptcies depends on the type of bankruptcy in each case.
Can I File for Bankruptcy on My Own?
Because bankruptcy is a complex process that requires a lot of paperwork, many people choose to hire an attorney to help them stay on track. The average cost for an attorney largely depends on the complexity of your case. And while you have the option to file for bankruptcy on your own, people who work with an attorney may fare better than those who don’t.
Keep in mind that once you file for bankruptcy, there is no guarantee that your petition will be approved or that your debt will be cleared. Not only can your creditors raise objections, but the court can also prevent certain debts from being discharged. They can also revoke a discharge that has already been issued if there are reasons to believe it shouldn’t have been issued in the first place. In those situations, it could be especially helpful to have a professional guide you through the bankruptcy process.
Bankruptcy Benefits & Risks
While bankruptcy could lighten some of your financial burdens, it isn’t the best option for every situation. There are serious short-term and long-term financial implications as well as a major impact to your credit. The decision to file for bankruptcy should be considered carefully, weighing not only the benefits but also the drawbacks. Here are the main benefits and risks of bankruptcy:
|You are granted an automatic stay. |
This means that creditors, lenders, and debt collectors may not contact you for additional repayment or take other actions against you.
|Your credit score will take a hit. |
A Chapter 13 bankruptcy stays on your report for 7 years, and a Chapter 7 bankruptcy stays on your report for 10 years from the final discharge date.
|You can hold on to some assets. |
In Chapter 13, you may keep your assets as long as you stick to your repayment plan. You may also be able to delay or stop a foreclosure or car repossession.
|You could lose valuable assets. |
Depending on which type of bankruptcy you qualify for, your income, the equity in your assets and other factors, you may lose your home, car, and other property.
|Some debts may be fully discharged. |
Any debts that are written off are gone for good. With a clean slate, you could have a chance to rebuild credit and improve your finances.
|Not all debts may be discharged. |
This includes some taxes, child support, spousal support, court orders, and debts incurred through fraud.
|New financing may be a challenge. |
Even though you may qualify for new credit after bankruptcy, you’ll likely see higher interest rates and fees. It may take a few years before you’ll be able to consider a big purchase, like a home.
|It becomes public record. |
Bankruptcies are publicly reported, so there is a potential for people you know to discover that you have filed.
Other Debt Relief Options
If you have so much debt that you are considering bankruptcy, most do-it-yourself debt solutions probably won’t work. But you could still have other options, including a debt consolidation loan or debt settlement.
A debt consolidation loan gives you enough money to pay off multiple debts so you are only left with a single, more manageable loan payment each month. You are essentially taking on one, new debt to pay off multiple existing debts. And while it may seem counterintuitive, the right debt consolidation loan could potentially get you a lower interest rate, simplify your payments, and help you get out of debt faster.
The catch is that you’ll need good credit to qualify, and if you’re already struggling to make your monthly payments, taking out a new loan could put you in a deeper hole. Debt consolidation is only a good option if you’re debt isn’t excessive, you have steady cash flow to cover your payments, and you have a solid plan to keep your debt in check.
If your credit is too poor to qualify for a debt consolidation loan, debt settlement offers an affordable way to resolve your debts. You can get more details about how debt settlement works here, but in general, it works by having a debt settlement company like Freedom Debt Relief negotiate with your creditors to get them to accept a lower amount on what you owe. This could help you save money and get out of debt faster.
Debt settlement does affect your credit, but there may be less of an impact than filing for bankruptcy. So if you have $7,500 or more in debt, are struggling to make your monthly payments, and considering filing for bankruptcy, it might be worth your time to get a no-obligation debt evaluation from Freedom Debt Relief to see if our program could help you.
Which Debt Solution Is Right for You?
Although bankruptcy is the right debt solution for some people, it’s not the right solution for everyone. Once your bankruptcy is discharged, there is no turning back. You cannot undo the decision, and the consequences will stay with you for a long time. It’s important to think past the immediate relief that bankruptcy could bring and weigh out all of your debt relief options to make sure you are choosing the best solution for both the short term and the long term.
To get an overview of several common debt solutions including bankruptcy, debt consolidation loans, and debt settlement, download the Freedom Debt Relief How to Manage Debt Guide. This free guide shows you how to evaluate your debt situation, find debt relief options, and choose the right solution for you.
And you can always get help over the phone from a friendly Certified Debt Consultant at Freedom Debt Relief. Call us at 800-910-0065 to get a free, no-obligation consultation and advice on all your debt options. We are here to help.