It pays to know all the steps to bankruptcy before you file.

4 minute read

If you’ve fallen behind on bills, mortgage payments, rent or other expenses, filing bankruptcy may seem like the only solution. However, filing bankruptcy should be a last resort, since bankruptcy appears on your credit report for up to 10 years for chapter 7 or seven years for chapter 13, lowering your credit score as a result.

Before you file bankruptcy, check into other options such as setting up a payment plan through a nonprofit credit counselor or your creditors or arranging debt consolidation. Still, if you must file bankruptcy, the process is fairly straightforward.

Find out the steps to file bankruptcy below.

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1. Choose between chapter 7 and chapter 13

Before you file, decide which type of bankruptcy serves your needs. The most common bankruptcies filed by individuals are chapter 7 and chapter 13, which differ in certain steps and outcomes.

With chapter 7, much of your property is sold and used to pay off debts. Remaining eligible debts get discharged so you don’t have to repay them.

A chapter 13 bankruptcy protects secured assets, halts collections, and lets you reorganize your debts, making timely payments on them for a period of either three or five years. If you catch up on back payments during the repayment period, you’re allowed to keep your assets.

2. Decide whether to hire an attorney

You can file bankruptcy without an attorney, which is known as filing “pro se.” However, you may want to consider hiring a bankruptcy attorney to smooth the process, avoid costly or fraudulent errors, ensure all paperwork is submitted to the court and guide you on whether to file chapter 7 or chapter 13 bankruptcy.

“Seeking the advice of a qualified lawyer is strongly recommended because bankruptcy has long-term financial and legal consequences,” according to UScourts.gov.

3. Complete credit counseling

You won’t be eligible to proceed with bankruptcy after filing until you’ve completed a credit counseling course from an agency or organization approved by the U.S. Department of Justice within 180 days before filing, according to UScourts.gov.

To find an eligible agency, search the DOJ’s list of approved credit counseling agencies by state and judicial district.

4. File for bankruptcy

Bankruptcy cases are handled through federal court, so you or your attorney must file the bankruptcy petition in the proper federal jurisdiction and pay the federal filing fee of $350.

A bankruptcy filing includes schedules listing your real estate and personal property, assets and liabilities, all debts, names of co-debtors, current leases or contracts, expenses and a statement of monthly income.

When filing for chapter 7 bankruptcy, you must also include a “means test” calculation form, which is used to determine whether your income qualifies you for chapter 7 bankruptcy. If filing chapter 13, you must submit a repayment plan within 14 days after the petition was filed.

5. Complete a debtor education course

After you file, you must also complete a debtor education course at a credit counseling agency or debt education provider that has been approved by the U.S. Trustee Program.

6. Pass the means test

Once you submit the means test calculation and statement of monthly income for filing chapter 7 bankruptcy, an independent, court-appointed bankruptcy trustee will analyze the documents and compare your income to your state’s “median income” to determine whether you’re eligible to file chapter 7 bankruptcy or must instead file chapter 13.

7. Attend a meeting of creditors

The case trustee will hold a meeting of your creditors between 21 and 40 days after you file your bankruptcy petition. During the meeting, you’ll be under oath and answer questions about your financial affairs and property from both the creditors and the trustee.

After the meeting, the case trustee will file a report to the court within 10 days on whether your case qualifies for chapter 7 or the case should be converted to chapter 13.

8. A trustee liquidates assets

With chapter 7 bankruptcy, the court-appointed trustee will liquidate your nonexempt assets to convert them to cash to pay unsecured creditors such as credit card companies who filed claims with the court. If all your assets are exempt, the trustee will file a “no asset” report with the court and unsecured creditors will receive no distributions.

9. A judge decides your case

With chapter 7, the bankruptcy judge appointed to your case will make a decision on whether your debts can be discharged. If so, the judge will issue a court order discharging your debts.

With chapter 7 bankruptcy, you won’t typically need to appear in court unless an objection is raised. If you file chapter 13, you may have to appear before a bankruptcy judge for a plan confirmation hearing.

10. Begin your repayment plan for chapter 13

Once the court approves your repayment plan on a chapter 13 case, you will begin repayment of your creditors for a period of either three or five years. You will make payments to the case trustee who will then distribute the funds to your creditors.

Once you complete all the payments required on the repayment plan, some of your debts may be discharged but you could still be required to repay other creditors.

11. Start rebuilding your credit

Once your bankruptcy case is completed, the information stays on your credit report for up to ten years for chapter 7 or seven years for chapter 13. After that period, the information automatically drops off your credit report.

Now is the time to begin rebuilding your credit by paying all bills on time so as time passes, your credit score and payment history improves.

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About the Author

Deb Hipp

Deb Hipp

Deb Hipp is a full-time freelance writer based in Kansas City, Mo. Deb went from being unable to get approved for a credit card or loan 20 years ago to having excellent credit today and becoming a homeowner. Deb learned her lessons about money the hard way. Now she wants to share them to help you pay down debt, fix your credit and quit being broke all the time. Deb's personal finance and credit articles have been published at Credit Karma and The Huffington Post.

Published by Debt.com, LLC