When you’re overwhelmed by debt, bankruptcy might sound like the fresh start you need to get creditors off your back. But everyone’s situation is different, and bankruptcy is not something to be taken lightly. Before making such a big decision, find out what you need to consider and what to expect from the bankruptcy process to better decide how to get rid of your debts.
Should I File Bankruptcy?
The decision of whether to file for bankruptcy requires you to take different variables into account. For example, more than one type of bankruptcy exists, and the terms and conditions will vary — some of which involve you losing your property. And if your only goal of bankruptcy is to keep from losing your home, you might have other options such as working out a payment plan with your lender or modifying your mortgage loan.
To understand all of your options, consider taking steps to find a lawyer who offers free bankruptcy consultations. From there, if you decide bankruptcy is the right choice, you might want to hire a lawyer to help you because, according to the United States Court’s website, misunderstanding the rules or making mistakes in filing can cost you.
Types of Bankruptcy
For individuals, two primary types of bankruptcy exist to choose from, namely Chapter 7 and Chapter 13, although Chapter 12 is also available for family farmers.
- Chapter 7: Filing Chapter 7 bankruptcy is a liquidation bankruptcy where a bankruptcy trustee sells all of your nonexempt property to pay off your creditors. To qualify for Chapter 7, your income must be below the median income for your state, or you must pass a means test, which compares your income to certain limits or your debt levels; an attorney can help you determine if you qualify. Also within 180 days before you file for Chapter 7 bankruptcy, you must go through credit counseling.
- Chapter 13: When filing bankruptcy, Chapter 13 is also called a wage earner’s plan because it allows you to put in place a plan to repay your debts over several years. Chapter 13 can allow you to save some of your property rather than having it sold to pay off your creditors, including allowing you to cure delinquent mortgage payments as long as you make the required payments going forward. To be eligible, your unsecured debts must be less than $394,725, and your secured debts must be less than $1,184,200.
- Chapter 12: Chapter 12 bankruptcy is for debt adjustments for family farmers. These rules are similar to the rules for Chapter 13, though typically a bankruptcy trustee isn’t appointed, so the debtor stays in possession of the assets.
It’s also possible in certain circumstances for individuals to file Chapter 11 bankruptcy — which is most often used by businesses and corporations — but you should consult a bankruptcy attorney to determine which option, if any, could be best for you.
Exempt Property In Bankruptcy
When filing bankruptcy, Chapter 7 or Chapter 13 exemptions can play an important role. In Chapter 7, exempt property is protected from your creditors, except when you have specifically given a creditor a security interest in the property. For example, when you sign a mortgage, you give the bank a security interest in your home, so the bank could foreclose on your home even if it is otherwise exempt.
The exemptions available to you depend on the state you live in. For example, in some states, your home or tools used in business might be exempt, either in part or in whole. An attorney can help you determine which property could be exempt in your situation.
Not all debts are dischargeable in bankruptcy. For example, tax claims, any debts you don’t list in your filing, debts for spousal support or child support, and government-funded or guaranteed educational loans are generally not dischargeable. So, you might need to find another way to pay off your student loans. An attorney can help you determine which debts can’t be discharged.
Find Out: 15 Ways to Pay Off Student Loans
Filing for Bankruptcy
Bankruptcy is a court proceeding, and it starts with you filing a petition for bankruptcy. Typically, you must also pay court filing fees, though in certain circumstances the fees can be paid in installments or waived. Bankruptcy forms are available online. Your petition must include the following information:
- A list of all of your creditors and the nature of each creditor’s claims.
- A list of all of your income, broken down by source, amount and frequency.
- A list of all of your property, including specifying all of your exempt property.
- A list of all of your monthly living expenses, including food, shelter, clothing, utilities, transportation and medical care.
Under Chapter 7, usually within 40 days of the filing, there will be a meeting with the creditors, and the debtor will have to answer questions under oath. With Chapter 7 bankruptcy, you typically receive a bankruptcy discharge from your dischargeable debts within three to five months.
Under Chapter 13, there are three types of claims: priority claims, which are given special status by law such as tax debts; secured claims, which are backed by collateral; and unsecured claims, which are not backed by collateral. You must file a repayment plan within 14 days of your filing, and the meeting with the creditors is usually held within 50 days.
The repayment plan must repay priority claims in full unless the priority creditor agrees to a different payment. Secured creditors must be paid at least the value of their collateral if the debtor wants to keep the collateral. Unsecured creditors are paid based on the debtor’s income and what the unsecured creditor would have received under a Chapter 7 filing.
Also with a Chapter 13 bankruptcy filing, you receive your bankruptcy discharge after you complete all your payment plan payments, which typically takes three to five years. Generally, if your income is below your state’s median income, the repayment plan will only be for three years, but if your income exceeds your state’s median income, you must usually set up a five-year payment plan.
At the end of the repayment plan, as long as you have complied with the requirements — which can be quite complicated — remaining dischargeable debts are discharged. An attorney can help you navigate the requirements, including which debts can’t be discharged.
Alternatives to Bankruptcy
Even if you owe a lot of money, that doesn’t guarantee that bankruptcy is the best option for you. Bankruptcy under Chapter 13 remains on your credit report for seven years, and a Chapter 7 bankruptcy remains on your credit report for 10 years, which could make applying for future financing difficult.
Instead of bankruptcy, you could try negotiating your debts with your creditors directly to see if you can get them to accept a lower payment or more flexible repayment schedule. You could also try debt counseling where a credit counselor can create a debt management program, similar to Chapter 13 bankruptcy, but with the advantage that bankruptcy doesn’t go on your credit report.
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