Bankruptcy is a court process that helps people and businesses get out of debt, especially in situations where they are struggling or unable to repay. Many people seek out bankruptcy when debts like medical bills, loans, mortgages and credit card debt are no longer manageable — often to the point of losing their home or getting calls from collections agencies. Bankruptcy situations are handled through bankruptcy courts, and the rules and regulations for how each case is handled are managed by the federal justice system.
In many scenarios, bankruptcy is a tool to help people create a clean financial start, or at least remove some debts while creating a payment plan to handle outstanding charges. Many struggling people fear bankruptcy because of myths like losing a home or all personal item, when in reality, every bankruptcy case is different (it’s rare that you’ll lose all of your personal items).
Although bankruptcy can help individuals and families struggling to get by, it’s important to know that bankruptcy isn’t a “get out of debt free” card. Court and attorney fees, the possibility of remaining debts, and the impact on your financial future make bankruptcy a serious legal matter that should only be used if necessary. In all cases, seeking out help from a financial counselor or an attorney before filing for bankruptcy is a strong start to winning back your financial security.
How Bankruptcy Works
When a person can no longer afford to pay debts or bills, they can seek out bankruptcy as final solution to their financial problems. In the simplest sense, a bankruptcy petition asks a court to do one of the following:
- clear all of your debts
- sell off some of your personal items to pay debts, and clear what debt remains afterwards
- create a payment plan for debts that allows you to get back on track
The main idea behind bankruptcy is that outstanding debts create financial hardship that you cannot escape. Clearing these debts can give you a fresh, financial start. How debt is cleared is based on what kind of debt it is. For example, some debts that can be discharged (removed) include:
- credit card balances
- medical bills
- overdue utilities (like bills for electric or gas)
- balances on foreclosed homes and property
But, bankruptcy will not clear all kinds of debt. Some debts a court won’t discharge include:
- student loans
- child support, spousal support or alimony
- taxes, fines and penalties
- credit card balances for luxury items (like designer clothing or electronics)
Every bankruptcy situation differs, and some allowed debts might not be cleared at all based on a judge’s decision. If a judge does discharge your debts, you are required to follow any rules put in place, such as making payments to collectors or seeking additional credit counseling. If you ignore these rules or a judge determines you have committed bankruptcy fraud, your cleared debts may return and you will be responsible for settling them.
Anyone can file for bankruptcy, but a bankruptcy court and attorney can determine if you qualify for different chapters (ways to file with different results). There are no minimum amounts of debt, but there are limitations based on your personal income; if your income is above your home state’s median income level, you may not qualify for all types of bankruptcy and will likely be set up with a repayment plan instead of having your debts cleared. In some bankruptcy chapters, there are limitations on how much debt you can claim.
Your eligibility for bankruptcy can also be impacted by previous bankruptcy cases. If you’ve previously filed, you may run into mandatory waiting periods that won’t allow you to receive an additional bankruptcy ruling for a number of years.
While most people are eligible to file bankruptcy in some way, everyone who files is required to obtain credit counseling 180 days before you submit your petition to a bankruptcy court. If you fail to seek help from a credit counselor, who will help you determine if bankruptcy is the best option and offer other financial resources, you will not qualify for bankruptcy.
How to File for Bankruptcy
While it’s heavily advised that you seek help from an attorney to file for bankruptcy, the process can be done on your own. You must first seek credit counseling at least 180 days before you approach a bankruptcy court to file. Each state has a bankruptcy court, and to start the process, you’ll need to fill out an application of sorts (called a petition, which can be found at your regional bankruptcy court or this website. This petition outlines your financial situation, debts, personal property and other information. These documents are submitted to your regional court, where a court trustee will review them after you pay filing fees. From there, the judge will determine how to proceed in handling your debts.
Where to Learn More About Bankruptcy
Every bankruptcy situation is different, and how your case is handled may be different than a how a court handles a family member or friend’s situation. To learn more about bankruptcy requirements, your financial rights and potential outcomes, visit the U.S. courts website. Choosing to contact a bankruptcy attorney near you can also help, especially since bankruptcy is a tedious legal process. If you’re unsure about bankruptcy, a credit counselor or financial advisor in your area can guide you in making the best financial choices.
Bankruptcy is a legal process that relieves people (and businesses) of debt they can’t repay. The word “bankruptcy” often brings to mind endless calls from collectors and difficulty making ends meet. While those things may lead individuals to file for bankruptcy, you should know that every financial situation is different, but the eligibility requirements and process for bankruptcy filing are relatively straightforward.
Many people look to bankruptcy when they’re no longer able to pay their debts — such as real estate, personal property, medical bills or loans — and are taking action to resolve delinquent accounts. The process is handled through the U.S. court system, and involves a debtor (the person who owes) to declare their inability to pay a creditor (the person or institution who lent). In some instances, debt may be wiped clean; in other situations, a debtor’s personal property may be auctioned or sold to help cover their debts, or items like cars may be repossessed. How debt is cleared varies by every bankruptcy situation.
If you are struggling or no longer able to repay loans or debts, bankruptcy may be an option to help you get back on financial track. But, the bankruptcy process isn’t a free pass to clearing debt — or always the best option. If you’re considering bankruptcy, it’s important to know exactly what the process entails, how much it can cost you and the impact on your financial future.
Common Bankruptcy Myths:
Bankruptcy removes all kinds of debt and leaves you with a clean slate. False!
Not all debts are erased by bankruptcy! Student loans and education loans can’t be cleared, and neither can child support or spousal support payments, taxes or court fees. It’s important to know that even if you file for bankruptcy, allowed debts (such as medical bills, credit card balances and balances on foreclosed properties) may not be entirely cleared away. A bankruptcy judge may require you to make payments on some of the debt, or help you find other ways to pay what you can (such as liquidation through chapter 7 bankruptcy).
Bankruptcy means I’ve failed financially or that I’m financially irresponsible. False!
Many people are ashamed or weary of filing for bankruptcy because of the misconception that they made poor financial choices. In many cases, people are led to bankruptcy because of extenuating circumstances such as unexpected medical bills, being laid off from a job or a major life catastrophe. Filing for bankruptcy doesn’t necessarily mean that you have failed at managing your funds.
If I file for bankruptcy, I’ll lose everything. False!
This common myth keeps many people from filing for bankruptcy, even though filing may help clear financial burdens. In most cases, filing for bankruptcy will not leave you destitute. While some forms of bankruptcy, such as chapter 7, liquidate your possessions to pay debts, it’s rare that you will lose all of your personal property.
I make too much money to file for bankruptcy. False!
While bankruptcy is open to anyone, regardless of how much debt they have, there are restrictions on what kind of bankruptcy you can file based on income. If you make more money than your home state’s median income, you can be restricted from filing for chapter 7 bankruptcy, and only able to file for chapter 13.
What Bankruptcy Will — And Won’t Clear
Bankruptcy is considered a financial last resort when it comes to handling expenses you just can’t chip away at. But, it’s not a magic fix-all or eraser for debt you owe. Depending on how you file for bankruptcy, you could face different scenarios for clearing away debt:
- All of your debt could be wiped away
- Some of your personal items can be sold to pay off debts, and what can’t be covered is cleared
- A court may require you to create a payment plan that allows you to get back on track with payments in a certain period of time
While bankruptcy can be a great tool at helping reign in or remove outstanding debts, it won’t work on every type of debt you owe. But, in many cases it can reduce or discharge many types of accounts you may own on, such as:
- medical bills
- delinquent utility bills (like water, gas or electric)
- balances on foreclosed homes
- credit card balances
- debt related to farming or fishing (specifically professional farmers or fishers)
- money owned to collections agencies
- balances on repossessed cars and items
- assistance loans for veterans
Some debts that a court won’t discharge include:
- student loans (except in extreme situations)
- child support, spousal support or alimony
- money owed for luxury or extravagant purchases, like expensive cars, electronics or designer handbags
- taxes, fines or any money owed to the government
- court fines, penalties or restitution from criminal cases
You should know that bankruptcy follows a set process, but every person’s results are different. What debt a judge allows you to get rid of may be different than a family member or friend — and for a variety of reasons, including how much you owe, why you owe it, how much money you make and your ability to repay any debt.
While filing for bankruptcy is pretty straightforward, there are several different filing options, each with their own rules and ways of clearing debt. These avenues are called chapters and vary by who is a filing (a person or company) and what kind of debt they have. Depending on your financial situation, one chapter may be a better way to file bankruptcy over other chapters.
Bankruptcy Terminology You Should Know
The legal jargon related to bankruptcy can be confusing, but it’s important to know what these terms mean if you chose to proceed with a bankruptcy filing. Even if you hire an attorney to defend you, understanding these basic terms will help as you work through bankruptcy.
Debtor: A person (or company) that owes money.
Creditor: A person or company who lends money with the understanding that it will be repaid. In some cases, a person who provides a service (such as a doctor) could be considered a creditor.
Filing pro se: If you choose to defend yourself in bankruptcy court, you are filing pro se.
Priority debt: Debt owed to government institutions, such as taxes.
Secured debt: This is debt backed by collateral, such as a mortgage (the home is collateral) or vehicle loan (the car is collateral).
Unsecured debt: This is debt not backed by collateral, such as medical bills or credit card balances.
Discharge: A court order that releases a debtor from any money owned to a creditor.
Liquidation: A process that takes personal property and belongings, and sells those items to help pay off debts.
Petition: An application to the bankruptcy court asking that your debts be discharged.
Chapter 7 – Liquidation for Individuals and Businesses
Chapter 7 bankruptcies are common because they can be filed by individuals and businesses. In the simplest sense, people who file for chapter 7 bankruptcy repay some or all of their debts by selling off real estate, personal property and items. Any remaining debt after your items are liquidated is cleared by a bankruptcy court, and there is no limit on how much debt you can have.
People who choose to file chapter 7 first start by submitting documents with a bankruptcy court in their region. A petition to declare bankruptcy includes a rundown of your financial status — that is, your income, how much money you owe and to whom, your expenses, tax returns, and any information on contracts, leases or mortgages (along with any particularly requested information). During this process, the court will assign you a trustee, a person responsible for reviewing your bankruptcy case and verifying all information you submit. If a judge approves your chapter 7 bankruptcy case, the trustee will determine what property of yours will be liquidated, and follow through on the process.
Many people fear chapter 7 bankruptcy because of the misconception that you can lose all of your personal property, since the idea is to liquidate your belongings to cover your debts. With chapter 7, there are protections — called exemptions — for what items you can keep, such as family heirlooms with sentimental value but no monetary value, your wedding rings, or small amounts of property. Exemptions vary by state, but are meant to help you keep some personal items so that you’re able to meet financial goals after bankruptcy, instead of starting from scratch.
Because chapter 7 bankruptcy potentially clears remaining debts, there are limitations to how frequently you can file. If a judge discharges some of your debts, or you are able to repay debts after liquidation, you must wait at least eight years before you can be granted another bankruptcy judgment. While it’s legal to file another bankruptcy claim before the eight years is over, a judge cannot give you a decision on your next case.
Chapter 9 – Reorganizing for Towns, Cities, Schools and More
Chapter 9 bankruptcy is setup for municipalities — that is, towns, villages, cities and public agencies like schools and hospitals — that need to reorganize debts in a manageable way. This form of bankruptcy appeared in the 1930s, a time when many towns, cities and schools financially suffered during the Great Depression.
Chapter 9 bankruptcy allows municipalities to create a payment plan for dealing with debt of all sorts, including debts like pension plans for employees. Like with other bankruptcy chapters, a trustee and committee (called a creditor’s committee) verify the bankruptcy situation and can help create a repayment plan. One benefit of chapter 9 is that it allows the filer (in this case a city, school or hospital) to negotiate debts with creditors so that they can be repaid.
Chapter 11 – Reorganization for Corporations and Businesses
Chapter 11 bankruptcy is specifically for corporations, businesses partnerships that are struggling with debt but looking to stay afloat. Chapter 11 allows these businesses — even sole proprietorship businesses — to restructure their debt into repayment plans, allowing them the chance to continue operating despite their amount of debt.
Like other kinds of bankruptcy, a trustee is empowered to help manage the business’ bankruptcy proceedings by verifying debt and company information, and helping create a repayment plan. But, unlike other circumstances, a trustee is also enabled to manage and run the business as they see best for getting the company back on financial track.
In chapter 11, a corporation or business can repay debt within a varying amount of time — as short as a few months or up to several years.
Chapter 12 – Farmers and Fishermen
Chapter 12 bankruptcy is special in that it only applies to farmers and fishermen who run family businesses. Because the farming and fishing industries are important to the economy, chapter 12 can give these workers special benefits when it comes to getting back on their financial feet.
With this form of bankruptcy, farmers and fishermen are able to create repayment plans to help pay down debt over the course of three to five years. Because farmers can have expensive equipment and land payments, chapter 12 bankruptcy is a better option than chapter 13, which has limits on how much debt can be taken to court. In chapter 12 bankruptcy, farmers have a debt maximum of $4,031,575; fishermen have a maximum of $1,868,200.
Chapter 13 – Reorganizing for Individuals and Businesses
Chapter 13 is meant for regular people and businesses looking to reorganize their debts into a manageable payment plan. Chapter 13 bankruptcy is a common alternative to chapter 7, because high-income earners have more resources to paying debts; because their income level allows them to repay debts, they aren’t eligible for chapter 7, which waives some debts and bills.
Unlike chapter 7, people who file for chapter 13 bankruptcy get to keep their possessions since there’s no liquidation. With this form of bankruptcy, a debtor is able to create a repayment plan and propose it to creditors and the court. If approved, this plan helps you repay debts in monthly installments over a period of three to five years. How much money the repayment plan covers depends on the court judgment, the amount you owe and kind of debt. In some cases, you may repay the debt entirely or just a partial amount during the three to five year span.
Chapter 13 bankruptcy can be a beneficial if you need additional time to catch up on important payments, such as a mortgage. The three to five year plan can help people make payments to delay or remove the risk of foreclosure. These repayment plans can also help you break down court costs, which can quickly add up during bankruptcy proceedings.
Even though repayment plans help you pay down debt without suffering threats from creditors, sometimes things go array with chapter 13 bankruptcy. In some situations, you may find that keeping up with mortgage or car payments is just too much, or unexpected situations like being laid off from work affect your plan. If this is the case, it’s possible to turn over a home or car to the original lender can help clear some or all of your debt, or ask the court for an extension to your repayment plan.
An important factor in understanding qualifications for chapter 13 bankruptcy is personal income. Many people who qualify for chapter 13 do not qualify for chapter 7 because their income is higher than their home state’s median income. If this is the case in your situation, know that you’ll be excluded from chapter 7 bankruptcy because there’s the chance you can repay all or much of your debts based on your income. Each state’s median income differs, but comparing your state’s median income level to your income can help you determine whether chapter 7 or chapter 13 is an option for you.
Unlike chapter 7 bankruptcy, chapter 13 limits how much debt you can take to bankruptcy court. You can have no more than $1,149,525 in secured debts (debts with collateral like homes and cars) and $383,175 in unsecured debts (like medical bills and credit card balances).
There are limitations to how frequently you can file chapter 13. If a judge approves your repayment plan, you cannot receive another chapter 13 decree for at least two years. While it’s legal to file another bankruptcy claim before the two years is over, a judge cannot give you a decision on your next case.
Chapter 15 – International Debt Situations
Chapter 15 bankruptcy helps people who have debt, but work or operate a business across international boundaries. This bankruptcy form is especially helpful when a company has debts or creditors in more than one part of the world. In the simplest sense, chapter 15 bankruptcy is a process that grants foreign creditors and officials access to a bankruptcy case (often chapters 7 or 11). For this reason, you cannot file for chapter 15 bankruptcy, though an attorney or government official can request this process.
NOTE: While chapter 7 and chapter 13 bankruptcies are common for individuals, there are many kinds of bankruptcy and their loopholes vary. It’s important to speak with financial and legal counsel to determine if a particular kind of bankruptcy works best for you.
Understanding Bankruptcy Eligibility Requirements
While bankruptcy is generally available to everyone — individuals, corporations and municipalities — some chapters have rules about who can apply. These rules ensure you get the best bankruptcy ruling possible, and help prevent bankruptcy fraud.
Eligibility for Chapter 7 Bankruptcy
Not everyone can qualify for chapter 7 bankruptcy. To be eligible for chapter 7:
You must be an individual or a business entity
- You cannot have a recent chapter 7 bankruptcy — there is an eight year waiting period between filing
- You must attend pre-bankruptcy credit counseling to obtain help and advice before filing, and have proof of attending
- You pass the “means test.” This test calculates your gross household income for six months prior to filing bankruptcy. Your average monthly income for this time cannot be above the median gross monthly income for families in your state. If your income is higher, you may not qualify unless expenses like taxes, mortgage payments and health insurance substantially lower your income.
Eligibility for chapter 7 bankruptcy means some of your debts could be repaid through liquidation, and the remainder could be discharged. If you don’t qualify for chapter 7 bankruptcy, chapter 13 may be your next option.
Example. Leonard wants to file for chapter 7 bankruptcy for $20,000 in credit card debt. Leonard has never filed for bankruptcy before, and attended credit counseling. Because his income of $33,000 is lower than his state’s median income, Leonard qualifies for chapter 7 bankruptcy.
Example. Henry wants to file chapter 7 bankruptcy for $56,000 in mortgage debt. Henry filed chapter 7 bankruptcy four years ago, making him ineligible to file again.
Eligibility for Chapter 9 Bankruptcy
Chapter 9 bankruptcy is for municipalities only, and has its own eligibility requirements:
A state law or government organization must recognize the city, school or entity as a debtor
- The municipality must be insolvent — unable to pay its debts
- The municipality must want to create a plan to repay debts
- Must have tried to contact or negotiate debts with creditors, unless it is believed that a creditor would reject suggested repayments
- Officials must attend credit counseling
Because chapter 9 bankruptcy is for towns, schools, hospitals and other public agencies, there can be many rules and loopholes for this kind of bankruptcy.
Example. Washington Village is unable to pay its debts, but wants to find a way to repay them. Village officials attempted to negotiate debts with creditors, but failed. Because of these attempts, the village likely qualifies for chapter 9 bankruptcy.
Example. Jefferson Township is unable to pay its $24,000 in debts. The town hasn’t tried to contact its debtors, but wants to file for bankruptcy. The town can’t qualify until it makes attempts to negotiate its debt.
Eligibility for Chapter 11 Bankruptcy
Chapter 11 bankruptcy is for businesses looking to reorganize their debt — that is, pay down debt while still operational. To qualify for this chapter, debtors:
have to file a full statement of their financial situation, including income, expenses, assets and liabilities, contracts and leases
- must have attended all court appearances and followed any court orders during the previous six months
- cannot have had a bankruptcy filing dismissed within the last six months
- must attend credit counseling within 180 days before filing for bankruptcy
If you qualify for chapter 11 bankruptcy, you’re on your way to helping your business get back on track. This will help you pay down debts while still staying operational.
Example. Jamie’s Pet Store has $76,000 in debt and is looking to reorganize its debt into a payment plan. The owner filed all the necessary paperwork and attended credit counseling. Because this was the store’s first bankruptcy attempt, it qualified for chapter 11 bankruptcy.
Example. The owners of Mary’s Mini Mart want to file for bankruptcy to repay $50,000. Unfortunately, the business’ first attempt in bankruptcy court was dismissed four months ago. For this reason, Mary’s Mini Mart doesn’t qualify for chapter 11 bankruptcy.
Eligibility for Chapter 12 Bankruptcy
This bankruptcy chapter is specifically for family farmers and fishermen. Chapter 12 bankruptcy offers special benefits for these business owners, but there are several eligibility requirements:
You must operate a farm or commercial fishing business
- Farming debts can’t be more than $4,031,575; fishing debts can’t be more than $1,868,200
- Majority of debts must be related to farming or fishing. For farmers, this is 50% of debts, and 80% for fishermen.
- More than 50% of income in the previous year must have come from farming or fishing
- You must attend credit counseling
For farmers and fishermen, passing these eligibility requirements can give access to chapter 12 bankruptcy that clears some or much of agriculture-related debt.
Example. Mary and Donald run a family fishery that is $390,000 in debt. All of their debts are related to buying fishing equipment, and 75% of their income comes from their work. Because of this, they qualify for chapter 12 bankruptcy.
Example. Maggie has $105,000 in debt related to running a chicken farm. Unfortunately, only 30% of her income is provided by the farm. For this reason, she does not qualify for chapter 12.
Eligibility for Chapter 13 Bankruptcy
Chapter 13 bankruptcy is an alternative to those who do not qualify for chapter 7 bankruptcy, often because their income is too high. You likely are eligible for chapter 13 bankruptcy if:
your secured debts (like mortgages and car loans) are less than $1,149,525 and unsecured debts (like credit card balances and medical bills) are less than $383,175
- you have attended credit counseling
- you do not have a bankruptcy petition that was dismissed within the last six months
In most cases, chapter 13 applicants qualify because of the less restrictive requirements compared to chapter 7 bankruptcy.
Example. Angie has $45,000 in credit card debt and $245,000 in mortgage and car debt. She attended credit counseling and is applying for bankruptcy for the first time. She qualifies for chapter 13 filing.
Example. Brad wants to use chapter 13 bankruptcy to clear his debt of $23,000, but he had a bankruptcy case dismissed five months ago. This means Brad does not yet qualify for chapter 13 bankruptcy.
NOTE: Are you unsure about which chapter you should apply for, or why you do or don’t qualify for a particular chapter? Contacting legal aid or a credit counselor can help you determine what chapter is best for you or fill you in on additional chapter requirements.
Filing for bankruptcy is a multi-step process, and one you can do so either with or without the help of an attorney. If you choose to hire an attorney to help with your bankruptcy case, rest assured that you’ll have legal and financial guidance about what form of bankruptcy will work best for you. If you choose to represent yourself in bankruptcy court, called filing pro se, you’ll need to thoroughly understand your rights in court, and the responsibility of self-representation.
Obtaining Legal Help
If you choose to enter bankruptcy as a means to becoming financially stable, receiving legal aid or counsel should be a first step. From here, a bankruptcy attorney will be able to analyze your financial situation and determine what may best work for you. Your legal advisor can also give you an idea of how your court proceedings may go, what possessions you may lose, and how you should interact with creditors during the court process.
Credit counseling is required for all kinds of bankruptcy, and helps debtors determine if bankruptcy is the right avenue to handling debts. Credit counselors will help you evaluate your financial situation, and explain the ins and outs of bankruptcy. A court will require you to present proof of credit counseling (in the form of a certificate) before you can receive a bankruptcy judgment. To submit your bankruptcy petition to a court, you must have received credit counseling at least 180 days prior.
Paperwork and Court Process
A bankruptcy application, called a petition, is a set of forms that outlines your financial status and debts. This petition is submitted to your regional bankruptcy court and evaluated by a trustee, an individual responsible for verifying information and checking for bankruptcy fraud. In some cases, applications can be returned for additional information, though the assistance of an attorney can help ensure paperwork is submitted correctly.
At the time of submitting your petition, court fees such as administrative and filing fees, will be due. These fees can vary in cost but can range up to several hundred dollars. In most cases, you are responsible for covering these fees (plus any attorney’s fees), but fees can be waved in situations where they are a financial burden to whomever is filing. For up to date information on court fees, visit the U.S. Courts website.
Trustees and Administrators
After your bankruptcy petition has entered the court system, you will be advised a trustee or administrator. A trustee (or administrator in Alabama and North Carolina) is tasked with verifying the information in your petition, including your amounts of debt, income and financial situation. Your trustee will also help determine any items that should be liquidated if you file chapter 7 bankruptcy, or manage your business if you file as a business. Trustees and administrators will also ensure you adhere to the discharge and judgment rulings set by the court.
Before a court dismisses your debt or accepts your repayment plan, you’ll meet with your trustee, and potentially some creditors, in what’s called a “341 meeting” or a “meeting of the creditors.” This meeting will be held in the trustees office and go through your bankruptcy case. If a creditor chooses to attend, they can make comment on debts owned or a suggested repayment plan, though it is rare that creditors actually attend.
Debt Discharge or Judgment
As your petition makes its way through bankruptcy court, a judge will review your case and bankruptcy plan. In most scenarios, you will not be required to attend a court hearing, and a trustee or lawyer will communicate your bankruptcy decision. Based on your unique situation, a judge may choose to clear — or discharge — your debts through liquidation, a repayment plan or by the rules of the chapter you file under.
In some cases, a judge may choose to dismiss your bankruptcy case. If this happens, you remain responsible for your debts and expenses and should consider other legal and financial ways of handling them. If your case is dismissed without a judgment, you do not have to follow the waiting period rules, and can file for bankruptcy again with no time restrictions.
Recovering from Bankruptcy
After you file for bankruptcy and receive a judgment, you’ll be required to attend another form of credit counseling called debtor education (or financial management counseling). These courses will help you understand finances after bankruptcy and give you tools to managing repayment plans and the consequences of filing for bankruptcy. Debtor education must be completed within 60 days of your discharge if you file chapter 7; anyone filing chapter 13 bankruptcy must complete debtor education before their final repayments.
NOTE: While the bankruptcy process generally follows the same flow for most individuals, how you file and if you file with legal assistance can impact how quickly your bankruptcy goes to court and how it is handled. Speaking with your regional bankruptcy court or a bankruptcy attorney can help you manage the process.
Bankruptcy can be a lifesaver for many who are struggling with debt. But, this raft doesn’t come without some consequences to your financial future. As you consider bankruptcy, it’s important to understand how your finances and credit could be impacted in the future.
Asset liquidation. If you choose to file chapter 7 bankruptcy, you can lose some of your property or assets. While there are exemptions you can claim to protect some of your personal items, you should be prepared for some property to be seized or sold.
Impact on your credit report. The note that you filed for bankruptcy can remain on your credit report for up to a decade, depending on how you file. For chapter 7 filers, your credit report may mention bankruptcy for up to 10 years; chapter 13 filers can expect it to remain for up to seven years.
Difficulty getting future credit and loans. This impact on your credit report can impact your score — lowering it many points and pegging you as less reliable and potentially risky. This means creditors and lenders may reject your attempts to get credit, or give you loans in smaller portions.
Higher interest rates. Credit you do get after bankruptcy may come with a higher interest rate. This allows lenders and creditors to lend to you, but with an incentive for you to pay back funds quickly.
Remaining debt. Not all of your debt may be discharged after bankruptcy. This means you may still be responsible for some debts, expenses and bills.
Co-signer responsibility. Even if your debt is discharged in full, any debt you owe that was obtained with a co-signer might not go fully go away. Because your co-signer accepted responsibility for your debt, creditors and collectors may pursue them to pay your debt.
Protections During Bankruptcy
When you enter the bankruptcy court, you are granted legal protections against discrimination, losing your job or losing retirement funds. And, once you petition a court for bankruptcy, creditors and collectors can no longer pester you for payments.
Federal protections ensure that you’re safe from discrimination if you file for bankruptcy. Whether you currently owe, are in the middle of a bankruptcy case or previously filed bankruptcy, an employer cannot fire you based on your personal financial situation. Additionally, government agencies can’t deny benefits or discriminate against you based on your finances.
Bankruptcy Filings and Public Information
You may be worried that everyone will know you’ve filed for bankruptcy. Your petition to clear debt, along with any court judgment, becomes public information if you file for bankruptcy. This is so lenders and creditors can make informed decisions based on your financial history. While anyone can access bankruptcy information, it’s unlikely that employers, coworkers, neighbors or friends will seek out this information or know about it unless you share it with them.
If you have savings in a bank account, it’s possible those funds can be used to pay some of your debts. But, any savings you have in a retirement fund are protected, and can’t be liquidated during bankruptcy. If you have a 401(k), IRA, Roth IRA or other retirement plan, you don’t have to worry about losing your hard-earned, nest egg savings.
Military personnel have additional protections related to bankruptcy. The Servicemembers’ Civil Relief Act is in place to allow military members to serve at home and abroad without financial worries that disrupt their work. As part of this protection, military members have access to lower interest rates on debt they owe, and are protected against extensive fees if they are required to cancel a housing lease (common for military members who move frequently). In addition, foreclosures on homes and repossession of items such as cars are delayed for active duty military members who are away serving their country; these legal proceedings can’t take place for up to a year after the military member returns.
Bankruptcy fraud is a white-collar crime that carries stiff penalties and repercussions. While many people who apply for bankruptcy are not looking to defraud the court system or their creditors and lenders, bankruptcy fraud does occasionally happen.
Many criminals who look to commit fraud try to have debt cleared for purchases and property, essentially making their possessions free or reduced-cost. One common sign of bankruptcy fraud is when an individual makes major purchases in the year or months leading up to filing for bankruptcy.
If a court believes you have committed bankruptcy fraud, your case will be dismissed, meaning you will be responsible for all debt. In addition, you face serious federal charges and penalties, including fines and jail time.
How to File for Bankruptcy
Filing for bankruptcy can be done through an attorney, or on your own (filing pro se). If you chose to file with an attorney’s aid, it’s important to select an experience bankruptcy attorney who can guild you through the process.
If you choose to file pro se, you can obtain the necessary bankruptcy forms through the U.S. Courts website (www.uscourts.gov). This petition can be submitted to your regional bankruptcy court to begin proceedings after you have obtained credit counseling.
NOTE: Before filing for bankruptcy, it is important to consider hiring an attorney or speaking with legal counsel. Because bankruptcy is a tedious, legal process, knowing your legal rights and the impact of a bankruptcy decision is crucial to your financial success.
Recovering from Bankruptcy
Coming out of bankruptcy can seem daunting, but there are ways to successfully work towards financial stability and improved credit. While bankruptcy can seem like an end-all to great credit, keeping financial goals in mind can help you get back on track.
Making payments on time. Making payments on both personal and home expenses (such as mortgage payments, utilities and bills) on time, as well as any funds for repayment plans, can help improve your credit and establish trust with creditors.
Living within your means. As you emerge from bankruptcy, it may be difficult to obtain credit or make large purchases. Living within your means, that is avoiding payments on credit or that stretch your budget, can help you establish strong financial roots.
Work to pay off remaining debt. Any debt that remains shouldn’t be forgotten about, because failure to repay can jeopardize your bankruptcy judgment or further impact your credit score.
Consider meeting with financial coach. Setting up a time to meet with a financial coach or advisor can help you outline your financial situation and goals. This resource can help keep you on track, or outline ways to lighten your financial load.