Here’s the Skinny on Filing Bankruptcy and How it Affects Your Life

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“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. These people have never filed bankruptcy.

There are 2 Types of Bankruptcy for Individuals

Chapter 7 is the most common. It’s for individuals who can prove they don’t have the means to pay off debts. After you file, a trustee could sell some of your assets to repay your creditors, but you’re otherwise discharged from responsibility for your debts.

Chapter 13 bankruptcy is for people with reliable income who are able to repay a portion of debt. In this case, a trustee sets up a payment plan so you can repay your debt over three to five years.

(You may have also heard of Chapter 11 — that’s usually for businesses.)

Why File Bankruptcy?

Wait, you might have to repay your debt, even after filing for bankruptcy? Then what’s the point?

The point is to get that “fresh start” you hear people talking about.

Bankruptcy should be a last resort for getting rid of debt, but for some people it’s better than having their wages garnished or their homes foreclosed.

It gives you a chance to get your debt under control and get creditors and collectors off your back (and out of your bank account).

So You’ve Decided You’re Filing Bankruptcy…

The process is pretty involved. For a deeper dive into the details, check out this post. Here’s a quick overview.

First of all, expect to pay $335 in administrative and filing fees. You can apply to have Chapter 7 fees waived 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, and you have to be unable to pay the fee in installments.

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 it know in writing, and the collections will likely stop. If it doesn’t, notify the bankruptcy court, which can punish the company for violating a court order.

You’ll spend most of the process working with a trustee, who administers the case.

The trustee helps you file paperwork and oversee 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.

Ultimately, a bankruptcy judge decides whether to discharge your debts. They could deny you for a few reasons, but if you were able to show your inability to repay debts, you should be granted a discharge.

If they grant in your favor, you’re released from personal responsibility for your debts, and creditors can’t take any more action to collect them.

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:

  • Auto loans
  • Mortgages
  • Child support
  • Alimony
  • Most tax debts

Will Bankruptcy Ruin 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. Some experts say bankruptcy won’t hurt it significantly 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 on what it feels like to declare bankruptcy and how she recovered her credit afterward.

Your Turn: Have you or anyone you know ever filed bankruptcy?

Dana Sitar (@danasitar) is a senior writer at The Penny Hoarder. She’s written for Huffington Post, Entrepreneur.com, Writer’s Digest and more, attempting humor wherever it’s allowed (and sometimes where it’s not).