Bankruptcy sounds like an intimidating and scary concept, but when you’re dealing with debt that’s impossible to manage, it may be your best alternative. This guide covers the different types of personal bankruptcy available to you and the proper steps to follow. It will also help you tackle your debts so you can move forward and start rebuilding your personal finances, putting yourself back on the path to stability and growth.
What is Bankruptcy?
Bankruptcy refers to when a person can no longer fulfill or pay off their financial obligations. It’s the last resort to handle your debt. However, it’s often the most sound decision and appropriate choice, depending on the circumstances. To learn more about what bankruptcy means, you can read our article:
What’s the Purpose of Filing for Bankruptcy?
Depending on the chapter that you choose to file, bankruptcy can offer important benefits for people who use this resource. Before learning about the different chapters, let’s review the principal advantages of filing for bankruptcy:
- Filing for bankruptcy can put an end to most of your monthly debt payments
- Bankruptcy can place your home’s foreclosure on hold (but it doesn’t mean you can stop making payments)
- Sometimes, bankruptcy can require creditors to return seized property, such as your car
- Bankruptcy stops wage garnishment (when your salary is withheld by court order)
- Once you file, you’ll receive fewer calls from collectors
- Bankruptcy prevents you from having utilities disconnected and can even help you get service restored
- It can allow you to challenge potentially fraudulent creditors or creditors who want to charge you more than what you owe
- Filing for bankruptcy offers an opportunity to start over financially
Before Filing for Bankruptcy
Filing for bankruptcy is an option to handle your debt. In many cases, it’s the last resort. It’s important to understand your other alternatives before making a final decision.
Analyze your debt
If you’re struggling to pay off your debts, consider the following steps before you file for bankruptcy:
Step 1. Calculate how much money you owe
Contact your lenders and take note of the total amount owed for each loan. This will make it easier to create a debt repayment plan.
Step 2. Review your income and expenses
To understand why you're struggling to pay off your debt, make a detailed review of your financial situation. The two most important factors to consider are your income and your expenses. Once you've taken time to review these, it's time to think outside the box! Come up with a few ways to reduce your expenses, increase your monthly income, or both.
Step 3. Make a budget based on your financial situation
Gain a good understanding of the total amount you owe, your expenses, and your income. Use this information to make a budget so you can prioritize paying off your existing debt. Reducing or eliminating unnecessary expenses is key.
Step 4. Contact your debt collector
Talk to your debt collector to see if you can adjust your payment plan. They may be willing to work with you to change the payment date, accept lower monthly payments, or lower your interest rate. If you do reach an agreement, make sure you do everything possible to make your payments.
Debt management plans
Designed for unsecured loans like credit cards, debt management plans work in the following way:
- A credit counseling agency determines if you and your creditors can agree on a plan for you to pay what is owed.
- After reaching an agreement, you deposit the established amount in an account managed by the agency.
- A credit counselor pays your bills according to the agreed-upon plan using the deposited funds.
- You continue to pay in the same way until you pay off the debt.
Keep in mind: A successful debt management plan requires 48 months or more of timely payments. You won’t be able to use or request additional credit until you’ve completed the payment plan.
Debt settlement programs are usually offered by for-profit companies. They target people with large amounts of debt, and work in the following manner:
- The debt settlement company negotiates with creditors to secure a one-time payment that’s lower than the amount you owe.
- While this happens, you deposit a fixed monthly amount into an account designated by the company.
- Once the account balance has reached an amount that’s enough to pay the settlement, the company makes the payment. Keep in mind that this process could take years.
The Federal Trade Commission (FTC) warns that settlement programs aren’t always the best way to handle your debt. If the company doesn’t secure the settlement, you could end up owing more than what you did in the first place due to late payments and accumulated interest.
It’s also important to look out for fraudulent companies. The settlement firm should provide the following information before you hire them:
- All service terms and conditions, including fees
- How long it will take to deliver results
- The consequences of not placing payments to your creditors on hold
- How much money you need to put into the designated account before the company can negotiate your settlement
- Confirm that the money you deposit in this account, plus any interest that accumulates, belong to you. This means that you should be able to withdraw the funds at any time without penalty.
Debt consolidation is one of the most popular ways to overcome financial difficulties. It consists of grouping multiple loans into one lump sum. You then pay off this amount based on an agreed-upon payment plan.Debt consolidation can be an excellent way to lower or simplify your payments, but it’s important to understand how it works. To learn more about debt consolidation, check out our article:
Which Type of Bankruptcy Filing Is Right for Me?
There are two types of personal bankruptcy filings: Chapter 7 and Chapter 13. Both require taking your case to a federal bankruptcy court. Here are some things to know about each chapter:
Also known as straight or liquidation bankruptcy, Chapter 7 requires listing all your assets and any exemptions you could claim for them. If an exemption fully covers your property, you can keep it, but any non-exempt property must be liquidated by a court-appointed trustee. The proceeds are then distributed to your creditors.
Requirements to qualify for Chapter 7
These are the requirements to file for Chapter 7 bankruptcy:
- No Chapter 7 bankruptcy filings in the last eight years
- No Chapter 13 bankruptcy filings in the last six years
- Undergo credit counseling from a licensed provider
- Meet the income requirements (which vary from state to state)
- Provide proof of income to demonstrate your inability to pay the debt
- List your property and know which assets are and aren’t exempt. Examples include:
- Exempt: Retirement accounts, public benefits, personal injury settlements, appliances, some jewelry, and low-value vehicles.
- Non-exempt: Bank accounts, valuable musical instruments, family heirlooms, collectibles, cash, second homes, and second cars.
Filing for Chapter 13 bankruptcy is more convenient if you have stable income and want to retain some of your assets, such as a mortgaged home or a car. Filing for Chapter 13 bankruptcy allows the court to establish a repayment plan for you to pay off your debt in the next five years without surrendering your property. At the end of this period, you’ll receive a discharge for all your debts.
Requirements to qualify for Chapter 13
These are the requirements to file for Chapter 13 bankruptcy:
- No Chapter 13 bankruptcy filings in the last six years
- Receive credit counseling from a licensed provider for at least 180 days before submitting your bankruptcy application
- Have enough income to pay off your debt
- List all mandatory debts, such as child support and mortgage loans
- Commit to the payment term limit, which could be between three and five years
- Demonstrate filed income tax returns for the last four years
- Outstanding balances must fall within the debt limits, which are adjusted based on inflation
Keep in mind: One of the most important benefits of Chapter 7 and Chapter 13 bankruptcies is that they stop foreclosures, seizures, injunctions, outages, and calls from debt collectors. Both types of bankruptcy can help cancel unsecured debts and provide exemptions for you to keep some of your assets.
10 Steps to File for Bankruptcy
If you’ve concluded that filing for bankruptcy is the best option, consider taking the following steps:
Step 1. Hire a bankruptcy attorney
To make sure you file properly, the best course of action is to hire an experienced attorney. This isn’t mandatory, but professional legal counsel can help you reach a better settlement in court.
Step 2. Credit advice
Before filing for bankruptcy, you should seek credit counseling from a United States Trustee-approved licensed provider. Keep in mind that before filing, you’re legally required to receive this advice within 180 days.
Step 3. Decide whether you’ll file for Chapter 7 or Chapter 13
After speaking to your attorney and a credit counselor, you should decide which chapter is best for you. This decision will depend on your current financial situation.
Step 4. Proof of income
If you choose to file for Chapter 7, you’ll have to demonstrate proof of income to show that you can’t afford to pay your debts. This process takes your monthly expenses into account and compares them to your income. If your income is less than your expenses, you should qualify for Chapter 7.
Step 5. Gather your paperwork
Once you decide under which chapter to file, start completing the required paperwork. These forms must include your assets, income, expenses, and debt. To access all the forms and list of required documents, visit the United States Bankruptcy Court website.
Step 6. File for bankruptcy
Once you fill out the forms and gather the required paperwork, you’ll submit your documents to the bankruptcy court. You’ll also have to pay the corresponding fees.
Step 7. Bankruptcy trustee
After submitting all your forms, the bankruptcy court will assign you a trustee. This person will work on your creditors’ behalf to verify the accuracy of your documents. They’ll also review your assets to determine which ones you’ll keep if you file for Chapter 7. Keep in mind that the rules that determine which assets you can keep vary by state.
Step 8. Automatic debt suspension
Once your filing is official, all of your creditors will receive a notification and enter an automatic waiting period. Your creditors cannot contact you, and you’ll stop receiving collection calls during this time. All payment agreements will go through bankruptcy court.
Step 9. 341 meeting with creditors
The next step is to meet with your creditors. You will receive a notification about the meeting’s date and time by mail or through your attorney. These meetings are run by a trustee. You can expect to review your debts and re-verify that your application is honest and accurate. Afterwards, the trustee will certify that you understand all the details and the consequences of your filing.
Step 10. Plan confirmation
The last step is to create a debt repayment plan, which will vary depending on the chapter you chose to file. Your creditors will have 60 days to challenge any clause or the entire plan.
Frequently asked questions
How does bankruptcy affect my credit?
Filing for bankruptcy will lower your credit score. Your bankruptcy case could appear on public record for up to seven years if you file Chapter 13 and up to ten years if you file Chapter 7.
To improve your credit score at the end of your bankruptcy period, you’ll need to get a new credit card, make payments on time, and refrain from applying for loans that you can’t pay off. This is the only way to gain access to the mortgages and car loans that will allow you to reach your financial goals. Stay the course and you’ll get back on track!
How often can I file for bankruptcy?
The amount of time you’d need to wait to file for bankruptcy again depends on the chapter that you selected the first time.
- Chapter 7: You must wait eight years to file for bankruptcy again if you already filed for Chapter 7, and four years if you filed under Chapter 13.
- Chapter 13: You must wait six years to file for bankruptcy again if you already filed for Chapter 7, and two years if you filed under Chapter 13.
How much does it cost to file for bankruptcy?
These are the bankruptcy filing fees:
- Chapter 7: $306
- Chapter 13: $281
If your income is 150% below the federal poverty line, you can request to have your fees waived. In addition to these expenses, you’ll have to pay legal, document drafting, and fact-verification fees.
Bankruptcy: An Option to Consider
We hope you’ve found this bankruptcy guide useful and informative. Before you make any decisions, consider other alternatives that may help you get out of debt. If you decide that filing for bankruptcy is the right choice for you, don’t hesitate to seek professional advice before starting the process.SABEResPODER is here to help. If you have any questions about this or anything else, you’re always welcome to reach out to our experts.