If you’re struggling with insurmountable debt, bankruptcy may be an action you’re thinking about taking. In this post, we explain what happens play-by-play when you file. One thing to note is that the process of bankruptcy can vary depending on the type of bankruptcy you file and the facts of your case. The following is a general overview of how bankruptcy works for the most common forms filed by individuals. We’ll cover:
The basics of Chapter 7 and Chapter 13 bankruptcy
There are multiple forms of bankruptcy that can be filed by cities, businesses, farmers, and more. The two forms that individuals typically file are Chapter 7 and Chapter 13. Here’s an overview of both:
Chapter 7 is the liquidation form of bankruptcy where your assets are taken to repay your creditors.
Some assets can be excluded from the liquidation, depending on your state and the bankruptcy agreement. Exempt items may include clothing and other household items. Unsecured debt, such as credit cards, personal loans, and debt in collections, are typically discharged.
To qualify for Chapter 7 bankruptcy, you have to pass what’s called a “means test” to prove you don’t have enough disposable income to repay your debts. You can learn more about the means test here.
If you have sufficient income to repay some of your debt, Chapter 13 may be the type of bankruptcy you file. Chapter 13 establishes a debt repayment plan that lasts from three to five years.
You may be able to save your home from foreclosure through Chapter 13 by adding delinquent mortgage payments to the repayment plan. Certain debts may be discharged once you meet the conditions of your repayment plan.
What forms of debt can’t be discharged in bankruptcy?
A discharge is when you’re no longer personally liable for a debt. After discharge for both Chapter 7 and Chapter 13, creditors cannot pursue collection or legal action against you for the debt. However, the discharge can be reversed if it’s determined you were given the discharge based on fraudulent records.
Bankruptcy won’t wipe away all of your financial obligations, either. For example, you may be responsible for the following after bankruptcy:
The dischargeable debts will vary from case to case. It’s a good idea to consult with an attorney to find out what debts can and can’t be discharged. In general, unsecured consumer debts such as personal loans, loans from relatives, payday loans, and medical bills may be discharged. In certain situations, secured debts may be discharged if you’re willing to surrender the property backing the debt.
Filing for bankruptcy? Here’s what to expect
Moving on to what you can expect before filing, during the process, and after filing:
Before you file for bankruptcy
Open your mail
“I can’t tell you how many times clients have come in to my office with a big garbage bag full of unopened envelopes,” said Raquel S. White, a bankruptcy attorney based in Prince George’s County, Md. You’ll need to open your bills and understand where you’re at so you can come up with a resolution.
Get credit counseling
A credit counselor can help you decide whether bankruptcy is the right choice or if there are other options you can explore before filing — indeed, credit counseling from a government-approved credit counselor is already a requirement to file for bankruptcy. This session will help you review your money situation, and it suggests alternatives to bankruptcy that you may want to consider.
The length of the session is typically from 60 to 90 minutes and costs about $50. You’ll get a certificate that you must submit. You can check out an approved list of counselors here.
Hire an attorney
You don’t need to file bankruptcy with an attorney, but it is advised. An attorney can guide you through the process, file paperwork and represent you through proceedings. During proceedings, the trustee — the person overseeing your case — can try to squeeze as much money as possible out of you to repay debts. An attorney will work on your behalf to fight for your financial interests. You can shop around for lawyers on sites like Yelp, or riffle through attorney directories such as the one available on the American Bar Association website.
Despite the social stigma of filing for bankruptcy, White told MagnifyMoney that she no longer advertises her services — all of her clients come from referrals. If you feel comfortable, you can ask a friend or relative for a recommendation.
Gather your financial documents
Compile all of your asset and liability statements to give to your attorney. You need to have a list of your creditors, a list of your properties, your income, your debts, and your monthly expenses to complete the filing.
The attorney may ask you to fill out a bankruptcy questionnaire when you meet. The attorney will use information you provide to prepare the documents. Here’s a rundown of the documents needed throughout the bankruptcy process:
- petition for bankruptcy
- schedule of assets and liabilities
- schedule of current income and expenses
- statement of financial affairs
- schedule of executory contracts and unexpired leases
You can review some of the forms on the United States Courts website.
During the bankruptcy process
Here’s how the filing process unfolds for Chapter 7 and Chapter 13.
What to expect in Chapter 7
Your attorney will help you prepare and file the bankruptcy petition. There are filing fees, administrative fees, and fees to be paid to the trustee. You may be able to pay the fees in installments; if you don’t have the means to pay the fees and your income is less than 150% of the poverty line, you may be able to have these fees waived.
Filing your petition puts an end to most collection calls and may even stop wage garnishments and lawsuits.
After 21 to 40 days of filing the petition, there will be a meeting of creditors that you attend with your attorney; the trustee and creditors will attend as well. At this meeting, you’ll answer questions about your finances. The trustee assigned to the case will liquidate assets to pay money back to creditors.
What to expect in Chapter 13
You file the petition for a Chapter 13 bankruptcy much like you do with the Chapter 7. There are filing fees, administrative fees, and trustee fees to pay. These fees can be paid in installments, or even waived if you make under a certain amount of income. The petition may stop the collections calls and foreclosure proceedings.
A meeting of creditors typically happens within 21 to 50 days after filing the petition. At this meeting, you’ll be asked questions about your finances. Your proposed repayment plan is filed. Afterward, there’s a confirmation hearing where creditors can raise objections about the repayment plan. Here is where having representation can come in handy. Your attorney will be fighting for your financial interests within the agreement. Adjustments may be made to the proposed plan before it’s finalized.
You make payments to the trustee. They send the money to the creditors on your behalf. There’s a hierarchy of debts that get paid through your repayment plan. Taxes and the costs required to go forward with the bankruptcy, like attorneys fees, are priority. The next debt in the priority hierarchy is secured debt. You need to satisfy payment terms on this debt because the creditor can take the property. The last debt in the hierarchy is unsecured debt, i.e. credit cards. Unsecured debt isn’t backed by collateral and may not be paid in full during the course of the repayment term.
According to White, creditors of unsecured debt can get back around $0.10 per dollar borrowed. At the end of the plan, remaining debts may be discharged as outlined in the agreement.
After filing for bankruptcy
The paperwork is in and you’ve gone to the required meetings — what’s next?
Complete a post-filing debtor education course
Course completion is required before your debt can be discharged. The post-filing debtor education course is one that teaches you how to manage money and credit responsibly moving forward. Like the pre-filing counseling session, this class has to be administered by an approved provider. The course can cost around $50 to $100 and you’ll get another certificate afterward. You may be able to do this course in person, over the phone, or online.
For Chapter 7, your debt will be discharged fairly quickly
The discharge order can take place within 60 to 90 days of the meeting of creditors unless creditors object to the discharge.
For Chapter 13, discharge happens after the repayment plan
The repayment plan agreement may be three to five years and your discharge will come after you satisfy the terms.
What happens to your credit
The credit hit is something you’re probably concerned about with a bankruptcy — but according to White, there’s a bit of good news here. Bankruptcy can have a longer impact on you if you’ve had a long history of nonpayment and credit problems leading up to filing. However, if you have great credit history and then a singular event causes you to file bankruptcy immediately, your credit will take a hit but it may bounce back faster.
“You have to remember, people are looking at your actual credit. They’re going to say, this person was doing great and then they had to file for bankruptcy — something outside of their control had to have happened,” said White. Creditors may be more willing to work with you if they see you’ve had a decent track record until this event. It often takes seven to 10 years for bankruptcy to fall off your report.
Is bankruptcy right for you?
Bankruptcy should be viewed as a final resort because of its financial ramifications. If you have a ton of equity in your home but you have, say, $30,000 sitting on an American Express credit card, White said bankruptcy is probably not the answer — your credit card debt can be resolved without resorting to it.
You can call up your credit card company and try to work out a payment plan. You could also refinance your debt with a balance transfer card or consolidate your debt with a personal loan. If you don’t feel comfortable managing all of this alone, you can contact a credit counselor to help you along the way. There are other resolutions that can come before bankruptcy, especially if the situation isn’t dire.
However, bankruptcy may be a step to consider if your debt is having a larger impact on your livelihood. Here are a few scenarios where bankruptcy could make sense:
If you’re facing foreclosure
Filing Chapter 13 bankruptcy is one way to stop foreclosure. Back payments can be included into your repayment plan so you can save the home. Other debts can be wiped out at the end of the repayment term to give you a fresh start.
If the repo man is calling
Similar to your home, filing bankruptcy could help you stop repossession and incessant collections calls when you’re in way over your head. If you set up a repayment arrangement through Chapter 13, the trustee will collect your payments and distribute to creditors for you so you don’t have to worry about communicating with collections agencies.
If you’ve experienced a life-changing event
Large unmanageable medical bills from an accident or illness could make your financial situation take a turn for the worst. Bankruptcy could be something to consider to get you back on track.
If you experienced a significant loss in income
Losing income unexpectedly can put you in a bind, and long-term unemployment can cause damage that you’re unable to repair. Filing bankruptcy could give you a clean slate.
Don’t Suffer in Silence
If you’re struggling with debt payments, don’t try to hide your bills under the rug. According to White, wage garnishments, bank garnishments, repossessions and foreclosures are all scenarios where you should run — not walk — to see an attorney or counselor for advice.
If you do end up deciding bankruptcy is the right course of action, it’s not the end of the world. The word sounds intimidating, but the steps are systematic and the overview in the post above gives you some insight into how it all works. Be sure to take advantage of the pre-filing and post-filing counseling because you may be able to learn valuable information about how to manage your finances and debt in the future.