Here’s the Skinny on Filing Bankruptcy and How it Affects Your Life
“I. Declare. Bankruptcyyyyyy!”
As Michael Scott learned in “The Office,” getting rid of debt isn’t as simple as that declaration. Wouldn’t that be nice?
Many people think of filing bankruptcy as an easy way out. But these people have never filed bankruptcy.
What Is Bankruptcy?
Bankruptcy is a legal process by which an individual, couple or corporation with significant debt is either relieved of that debt or allowed to pay it off under a specified plan.
That may sound really appealing if you’ve got debt up to your eyeballs, but realize that even after filing bankruptcy, you may still have to repay your debt.
All bankruptcy really does is give you a metaphorical fresh start with your finances. Fresh like when you were 18 and the only credit card you could qualify for had 82% interest and a $500 limit.
While for some people, bankruptcy is better than having their wages garnished or their homes put into foreclosure, it should be a last resort for getting rid of debt.
But if you’re out of options, bankruptcy can give you a chance to get your debt under control and get creditors and collectors off your back (and out of your bank account).
Here’s How Bankruptcy Works
The process is extremely complex, so don’t expect to go through it alone — and don’t expect it to be cheap.
First, you’ll file with the bankruptcy court in your federal judicial district. There’s at least one in every state. In most cases, this administrative process is carried out by a trustee appointed to your case.
The trustee helps you file paperwork and oversees your estate (anything you own) during the case. They’re an impartial player who can challenge creditors’ claims or yours, based on conversations with both.
Then a bankruptcy judge decides whether to discharge your debts. They could deny you for a few reasons:
You failed to keep or produce adequate financial records.
You failed to explain any loss of assets.
You committed a crime, e.g., perjury.
You failed to obey a lawful order of the bankruptcy court.
You hid property that would have been included in your estate.
But in general, if you were able to show your inability to repay debts, you should be granted a discharge.
If they rule in your favor, you’re released from personal responsibility for your debts, and creditors can’t take any more action to collect them.
Bankruptcy Will Trash Your Credit Score
Bankruptcy will most likely be a black mark on your credit history — one that lasts up to 10 years.
But if you’re in over your head with debt, your credit is probably already pretty marred already.
Some experts say bankruptcy won’t hurt your credit much more than a poor payment history. Just make sure filing bankruptcy is really your best option, because the aftermath is not fun.
Here’s one woman’s story of what it feels like to declare bankruptcy and how she repaired her credit afterward.
Beware Bankruptcy Fraud
Remember when you’re filing: Bankruptcy is a legal action judged in federal court. So if you try to pull one over on your judge or trustee, expect some serious consequences. Here are some major no-nos:
Concealing assets to avoid having to forfeit them.
Intentionally filing false or incomplete forms.
Filing multiple times using either false or real information in several jurisdictions.
Bribing a court-appointed trustee.
If you’re caught doing any of these you could be fined, denied discharge or face criminal charges.
Types of Bankruptcy for Individuals
Individuals and couples can file one of two types of bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 is the most common and is often referred to as liquidation bankruptcy. It’s for individuals who can prove they don’t have the income or means to pay off debts.
After you file, a trustee would help you sell your non-exempt assets, such as your home, car or other valuables, to repay your creditors. Then, even if the sale of those items doesn’t cover the debt in its entirety, you’re discharged from responsibility for your debts.
There is no debt limit for Chapter 7, but your “means” to pay off your debt will be tested and anyone who files for it is required to take credit counseling courses within six months of filing.
Most people can expect the process to take anywhere from three to six months.
Chapter 13 Bankruptcy
Chapter 13 — or “wage-earner bankruptcy” — is for people whose income makes them ineligible for Chapter 7. Individuals and families who file Chapter 13 will work with a trustee to restructure and reorganize their debts and pay it back over three to five years, in which time debtors are not allowed to take on any additional debt.
You won’t have to liquidate any assets in Chapter 13, meaning you can keep your house. Instead, your payment plan will be determined by your household income and how it compares to your state’s median income.
Chapter 13 bankruptcy does come with some debt limits. According to the Federal Judiciary, you can only have:
- $1,184,200 in secured debt, i.e., debt that is secured by collateral, like a house or car.
- $394,725 in unsecured debt.
Federal law requires you to make your first payment to your trustee 30 days after filing.
Other Types of Bankruptcy
The Federal Judiciary describes bankruptcy as it applies to businesses and less common types of bankruptcies. Here’s a basic overview:
|Type||Typically Used by||Basic Requirements||Debt Limit||Filing Fee*|
|Chapter 7||Individuals||Prove you don't have the means to repay debts||n/a||$335|
|Chapter 13||Individuals||Have reliable income and the ability to repay debts||$394,725 unsecured; $1,184,200 secured||$310|
|Chapter 11||Businesses||Be engaged in commercial or business activities||$2,566,050||$1,717|
|Chapter 9||Municipalities, including cities, counties and school districts||Municipality must be insolvent||n/a||$1,717|
|Chapter 12||Family farmers and fisherman||Individual or married couple whose primary income and debt are related to the farming or fishing operation||$4,153,150 farming; $1,924,550 fishing||$275|
|Chapter 15||Foreign debtors||Case must involve parties outside of the U.S.||n/a||$1,717|
*Fees and requirements are accurate as of February 2019.
What to Expect When You File Bankruptcy
The process is pretty involved, and you’re probably going to want to consult with a bankruptcy attorney to make decisions for your individual case. Here’s a quick overview of what to expect.
You can apply to have Chapter 7 fees waived (with this form) or set up a payment plan for Chapter 13 fees if you can’t afford them upfront. To be eligible for a waiver, your household income should be less than 150% of the poverty line (calculated for you here), and you have to be unable to pay the fee in installments.
Additionally, you’ll be responsible for legal fees, which will vary.
Once you file bankruptcy, creditors and collectors have to stop trying to collect the money you owe them while the case is open.
That’s called an “automatic stay.”
If a company continues to try to collect during the stay, it’s violating a court order. Let the company know in writing, and the collections will likely stop. If they don’t, notify the bankruptcy court, which can punish the company for violating a court order.
Remember: Bankruptcy (Almost) Never Discharges These Debts
Debtors typically use bankruptcy to discharge credit card or medical debt. Many types of debt can’t be discharged this way, including:
- Student loan debt (except sometimes).
- Child support.
- Most tax debts.
- Debt you owe someone as a result of a criminal or civil charge, e.g., injury caused by a DUI.
For auto loans and mortgages, your debt may be discharged, but it could mean the creditor can seize the property you took a loan against — they could repossess your car, for example.
You can instead choose to “reaffirm” the debt, or leave it out of the bankruptcy discharge, and you’ll remain responsible for paying it off. And you get to keep your property.
Dana Sitar ([email protected]) is a writer and editor at The Penny Hoarder. Say hi and tell her a good joke on Twitter @danasitar.