Bankruptcy

Filing for bankruptcy is never an easy decision, but sometimes it’s the right one. And while it will have a serious impact on your credit if you decide to file, in many cases it may allow you to close out this challenging chapter in your financial life faster. As a result, you can avoid ongoing credit damage and start to rebuild instead of continuing to try and dig yourself out of an impossible situation with debt.

With that in mind, Debt.com has created this in-depth guide to filing bankruptcy in the U.S. It can help you understand how the process works and what to expect if you decide to file. If you have questions or would like a free debt evaluation to help you decide if it’s right for you, call .

Table of Contents:

What is bankruptcy?

Bankruptcy is a legal tool that helps people and businesses be free of debts. Additionally, bankruptcy allows creditors to receive some type of repayment. The Federal Court system handles bankruptcy. After the bankruptcy, the debtor will largely be debt-free, although not all debts may be discharged.

If you need to file bankruptcy, it’s best to do it sooner rather than later so you can start rebuilding as soon as possible. It is a critical decision that you should make quickly once you have all the facts.

Types of bankruptcy

There are six general types of bankruptcy, but only four of them apply to consumers. The common types of personal bankruptcy are Chapter 7 and Chapter 13, so we’ll provide more details on these two types of filing throughout this guide.

In Chapter 7 bankruptcy, a court will sell assets that don’t qualify for exemption to pay off your creditors. This is the fastest type of bankruptcy, taking only four to six months.
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Chapter 11 bankruptcy reorganizes your debts and gets repaid over three to five years. It’s primarily intended for businesses and people with a high net worth.
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Chapter 12 bankruptcy offers greater protections from creditors because creditors do not have the right to object. But only farmers and fishermen can use it.
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Chapter 13 bankruptcy, will help you avoid liquidating any assets to discharge your debt. Instead, you will pay your creditors back in a 3 or 5-year payment plan.
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Other types of bankruptcy

The last two types of bankruptcy are not for consumers or businesses:

• Governments such as towns or cities use Chapter 9. These governments get protection from creditors while they reorganize and adjust their debts.
• Chapter 15 deals with cases that involve more than one nation. It helps promote cooperation between the US and foreign courts.

Filing for bankruptcy

1. Filing for bankruptcy involves a lot of paperwork and decisions. However, it is worth the effort to get that fresh financial start for most people. Before and during filing, you should look over your debt. You should consider bankruptcy if you are unable to:
   1. Save for emergencies and long-term goals
   2. Pay off your debts
   3. Afford your bills and daily expenses
2. Enroll in pre-bankruptcy counseling. The course is part of your required tasks. The court will ask for the record of your course.
3. Find a qualified attorney that can guide you through the process. Although you can file pro se (without legal representation), this is not recommended.
4. Understand which assets you have that will be exempt and then decide which Chapter to file based on your needs, assets, and goals.
5. Fill out all the bankruptcy forms so they can be filed with the court. This includes completing paperwork that verifies you are eligible to file.
   1. For Chapter 7, you must pass a means test to file.
   2. For Chapter 13 you must complete similar forms to the means test that show you have the disposable income necessary to make payments.
6. Pay filing fees. You can also request a waiver if you file a Chapter 7.
7. Once you’ve filed, an automatic stay will be issued, which stops any collection actions, including wage garnishment and even foreclosure. The stay remains in effect until you complete your filing.
8. A bankruptcy trustee will review your paperwork.
9. Attend a confirmation hearing. You will meet with creditors in the hearing if they object to your filing or payment plan.
10. Complete a debtor education course. Upon completion, you’ll have a certificate to file with the court.
11. Get the discharge of your debts.
    1. With Chapter 7, you can receive your discharge in 90-120 days
    2. With Chapter 13, it can take three to five years.

Finding the best bankruptcy attorney

Bankruptcy is a powerful legal option if you cannot use other debt relief methods. Don’t worry about what others might say if you are thinking about bankruptcy. Your finances are your personal choice. There is nothing wrong with choosing the best option for your situation.

Contact an attorney as soon as you can so that you understand all the facts about this crucial decision. Choosing the right attorney can be a challenge. Before you make up your mind, ask questions, discuss your goals, and remember that you are paying them. Be sure to check references, reviews, and consumer complaints.

How attorney fees are determined

Currently, there are no standard attorney fees. States do not set fees. Most attorney’s rates reflect the local market. But prices must be “reasonable” according to bankruptcy laws. Courts do have guidelines, and a court can review a high fee and refund it.

Advantages and disadvantages

Bankruptcy can give you control of your finances back to you. But there are drawbacks, too. The filing will be noted on your credit report for the next seven to ten years.

Each method, Chapter 7 or Chapter 13, has distinct advantages and disadvantages.

• You could lose assets in Chapter 7 if they don’t qualify for exemptions, but you’ll finish much sooner.
• Meanwhile, Chapter 13 will tie you up with a payment schedule for three to five years. We are in an era of economic uncertainty. You could lose your job in the next three to five years or have other financial issues. So be sure you are making the right decision.

So, let’s look at the pros and cons of these two most popular chapters to see how they compare to each other and to the option of not filing at all:

Who declares bankruptcy?

In the first quarter of 2021, over 105,000 individuals declared bankruptcy. These are people from all walks of life, including those who make a lot of money and those who earn less. The one thing in common is they all needed a fresh financial start.

When should I declare bankruptcy?

As you weigh the question of “Should I file?” there is a range of factors you should consider. But if you are in debt and struggling just to meet your monthly minimums, then bankruptcy should be an option on the table. Bankruptcy is a serious decision to make. To have the least amount of damage to your finances, you should make this decision as quickly as possible.
However, you also need to understand and consider the alternatives to bankruptcy. These include:

• Credit counseling
• Debt settlement
• Debt consolidation

Discharge eligibility in bankruptcy

When you go into bankruptcy, your goal is to get debts “discharged.” This means your lender agrees to no longer hold you responsible for the debt. In return, they often get some percentage of the payment due.

Debts that can be discharged

In Chapter 7, you’ll no longer owe credit card debt, personal loans, medical bills, and more. Chapter 13 covers even more and includes debts for “willful and malicious injury to property” and debts from financing a tax payment. It also includes debts from property settlements resulting from divorces or separations.