Filing for bankruptcy can be a long and stressful process, but it doesn’t have to be. Typically, the most stressful part is trying to manage the financial difficulties that lead you to consider bankruptcy and finally deciding to file. Once you decide that bankruptcy is the right course of action for your financial situation, you’ll work with an attorney and trustee. They will oversee the process and help you handle issues as they arise.
Filing for bankruptcy is simply a matter of filling out paperwork correctly and approaching the process in the right order. To give you an idea of what to expect, here is an overview of the types of bankruptcy available to individuals, the bankruptcy filing process, and some common pitfalls to look out for.
Types of Bankruptcy
There are generally two types of bankruptcy available to individuals, each named after the applicable chapter of the Bankruptcy Code.
In a Chapter 7 bankruptcy, your eligible assets are liquidated, or sold to pay off creditors. State law determines the types of property that are exempt from liquidation, but they may include a portion of your home equity, a vehicle and other tools used in your work, and personal property, such as clothing and household goods. At the end of the process, many of your debts will be discharged, or wiped out.
However, this isn’t true of all debts. Some debts you cannot discharge in bankruptcy, including:
- Child support and alimony
- Fines, penalties, and restitution owed for breaking the law
- Certain tax debts
- Debts that arise out of another’s person’s death or injury as a result of you driving while intoxicated
- Home mortgages
- Some student loans
To qualify for Chapter 7 bankruptcy, you must pass a means test to determine whether you have the means to repay a portion of your debts. If the calculation determines you can afford to repay part of your debt, you will not qualify for Chapter 7.
Chapter 13 bankruptcy is known as a “wage earner’s plan.” It’s for people who have a regular income but cannot manage to repay all of their debts.
In a Chapter 13 bankruptcy, you’re allowed to keep your assets, but the trustee helps you set up a plan to repay creditors over a three- to five-year period. During this time, creditors cannot pursue collections. At the end of the payment period, the court discharges your remaining eligible debts.
How to File for Bankruptcy
If you’re considering filing for bankruptcy, these are the steps you must take.
Step 1: Find an Attorney
You can find a lot of information about bankruptcy online, but you need to talk to an experienced personal bankruptcy attorney familiar with the laws in your state. You can make your financial troubles worse by putting off dealing with your problems, transferring assets to a friend or family member, or paying off the wrong creditors.
To find an experienced attorney, get a referral from your accountant or family attorney. Your local bar association can also refer you to a bankruptcy attorney in your area.
Step 2: Get Credit Counseling
The federal Bankruptcy Code requires individuals to get credit counseling within 180 days before filing for bankruptcy. If you’re married, both you and your spouse must attend credit counseling.
Not all credit counselors qualify. You can find a credit counseling agency approved by the U.S. Trustee Program through the U.S. Department of Justice.
Step 3: Complete a Petition & Paperwork
Completing the paperwork to petition for bankruptcy is often the most time-consuming part of filing for bankruptcy. In addition to the petition prepared by your attorney, you will have to provide documentation for your:
- Assets. This includes anything you own that has value, such as stocks, savings accounts, real estate, cars, collectibles, home furnishings, clothing, and art.
- Debts. This list should show the creditor, current balance, interest rate, and monthly payment for each of your debts. Include all debts, even those you’re current on paying and those you can’t discharge in bankruptcy.
- Income. Include any money you’ve received for any reason in the past six months, any money you expect to receive in the future, how often you receive this money, and where it comes from. That includes regular wages, unemployment compensation, side job income, dividends and interest from investments, pensions, and money contributed to the household by other people, such as your spouse or family members.
- Monthly household living expenses. Include your costs for rent or mortgage, food, utilities, medical expenses, clothing, taxes, transportation, child support, and alimony. When listing variable expenses, such as utilities, calculate an average based on the past year’s monthly bills.
- A certificate from your credit counseling agency showing that you completed the program.
- A copy of the debt repayment plan developed by your credit counselor.
- Pay stubs for the last two months, if any, and a statement detailing any anticipated changes to your income and expenses after filing.
- Your tax return or transcripts for the most recent tax year.
Filing your petition for bankruptcy “stays” collection actions, meaning your creditors can’t foreclose on your home, repossess your vehicle, file a lawsuit against you, garnish your wages, or even make collection calls. There is one important exception to this automatic stay: Automatic payments taken out of your paycheck for a 401(k) loan continue.
The court is required to charge case filing fees and administrative fees. In most cases, you must pay these fees before filing, but you can apply to pay in installments using Form B 3A. Just keep in mind that you must pay the whole amount within 120 days of filing, and you must pay each installment as agreed, or you run the risk of the court dismissing your case.
The fees are as follows:
- Chapter 7: $425 case filing fee, $75 miscellaneous administrative fee, $15 trustee surcharge
- Chapter 13: $235 case filing fee, $75 miscellaneous administrative fee
You may also be charged additional fees for copies of paperwork, filing amendments to your list of creditors, converting a Chapter 13 case to a Chapter 7 case, reopening a closed bankruptcy case, and more. Check out the U.S. Courts’ Miscellaneous Fee Schedule for a complete list of fees.
If you file for Chapter 13 bankruptcy, you will also submit a repayment plan at this point. This plan outlines the fixed amount you’ll pay each month and how the trustee will distribute those funds to your creditors.
Step 4: Meet Your Trustee
After you file your petition, the court appoints a trustee to your case. It’s the trustee’s job to oversee your case, liquidate any nonexempt assets (for Chapter 7), and distribute funds to your creditors (for Chapter 13).
The trustee also makes sure you understand the potential consequences of bankruptcy, as it will impact your credit score and your ability to file for bankruptcy in the future.
To complete your bankruptcy filing quickly and successfully, you must cooperate with your trustee and promptly provide any financial records and documents they request.
Step 5: Attend a Meeting of Creditors
After you file your bankruptcy petition, the trustee will hold a meeting of your creditors. During this meeting, the trustee and your creditors will ask you questions you must answer under oath.
If that sounds scary, don’t worry; your lawyer will prepare you for the meeting and attend it with you. In most cases, the questions will be similar to the ones you’ve already answered in your petition. The purpose of the meeting of creditors is to have you confirm, under oath, that the information in your paperwork is accurate and complete.
Step 6: Your Eligibility Is Confirmed
After the meeting of creditors, the court should have enough information to decide whether or not you’re eligible for bankruptcy protection. If you are eligible, your case will proceed. If you’re not, you have the option of filing for another bankruptcy chapter.
Step 7: Nonexempt Property Liquidation or Repayment Plan
If you file for Chapter 7 bankruptcy, any nonexempt property will be liquidated to pay off your debts at this point.
Your trustee will determine whether your nonexempt assets are worth selling. In some cases, you may be able to keep some nonexempt assets if the trustee determines that selling them isn’t cost-effective. For example, say you own a car worth $3,000. You owe $2,800 on the car loan, and it would cost $200 to sell the car. In this case, the trustee may determine that selling the vehicle is not in your creditors’ best interests.
If you file for Chapter 13 bankruptcy and the court confirms your proposed repayment plan, it’s up to you to stick to the repayment schedule outlined in that plan. Most repayment plans last three to five years. If you can’t make the agreed-upon payments during this time, the court may dismiss your case or convert it to a Chapter 7 liquidation case. If circumstances beyond your control make it impossible for you to continue making payments, the court may be willing to modify the plan or grant a hardship discharge.
Step 8: Your Debts Are Discharged
In a Chapter 7 bankruptcy, your remaining debts will be discharged once the trustee sells your nonexempt assets and pays out creditor claims.
In a Chapter 13 bankruptcy, before the court concludes your case and discharges your remaining eligible debts, you must complete a personal financial management course. This course is designed to educate you on personal financial management. You can search for an approved debtor education provider in your area via the U.S. Department of Justice.
Once your debts have been discharged, those creditors are no longer allowed to take any collection actions against those debts.
Pro Tip: If you file for bankruptcy, it’ll take a lot of hard work to build your credit score back up. To get a head start, sign up for Experian Boost. This free service factors in payments from utility bills to help give your credit score an immediate boost.
Additional Considerations for Bankruptcy
Before you start the process of filing for bankruptcy, here are a few more things to consider.
Married couples with financial problems may choose to file separately or together. Many choose to file together to avoid having to pay two separate filing fees and because both spouses’ names are on their home loans, credit cards, and car loans. If one spouse files for bankruptcy, creditors may begin collection proceedings against the other spouse for any joint debts, even if that spouse cannot afford to make payments on their own.
From a credit standpoint, it may seem logical for only one spouse to declare bankruptcy so that the other can preserve their credit score. However, this isn’t effective if both spouses are responsible for the debt.
The court is not guaranteed to approve your bankruptcy petition or discharge all of your debts. The court can even revoke a discharge that has already been processed if there are reasons to believe it should not have been approved in the first place.
Some of the issues that can plague your bankruptcy petition include:
- The court has evidence that you acted fraudulently or committed perjury.
- You fail to provide required tax documentation.
- You cannot account for a loss in your assets’ value.
- Your transfer or hide property with the intent to keep it from creditors.
- You intentionally destroy or hide documentation, paperwork, or records.
- You acquire new property or other assets over the course of the bankruptcy proceeding and do not notify the trustee or court.
- You are asked for explanations, information, or additional documents during a review or audit of the case and do not provide it.
- You fail to obey a lawful order of the bankruptcy judge or trustee.
- You do not complete the required credit counseling program.
- You do not complete the Chapter 13 payment plan in full or on time.
An individual cannot have their debts discharged in multiple bankruptcy filings over a short period. The length of time before you’re eligible for another discharge depends on the type of bankruptcy you filed originally and which type you want to file now.
- Chapter 7 to Chapter 7. If you previously received a discharge in a Chapter 7 bankruptcy, you must wait eight years from the date you filed the previous case before receiving a discharge in another Chapter 7 case.
- Chapter 13 to Chapter 13. If you previously received a discharge in a Chapter 13 bankruptcy, you must wait at least two years from the date the first case was filed to receive another Chapter 13 discharge.
- Chapter 7 to Chapter 13. If you previously received a discharge in a Chapter 7 bankruptcy, you cannot get a discharge in a Chapter 13 bankruptcy for four years after the filing date of the initial Chapter 7 petition. However, you can file for Chapter 13 before that four-year window is up to get help paying off priority debts or get caught up on other payments. Filing for Chapter 13 after a Chapter 7 is commonly referred to as a Chapter 20 bankruptcy.
- Chapter 13 to Chapter 7. If you previously received a discharge in a Chapter 13 bankruptcy, you must wait six years from the date that petition was filed to receive a discharge in a Chapter 7 bankruptcy. However, this six-year rule does not apply if 1) you paid back all of your unsecured debts, or 2) you paid back at least 70% of your unsecured debts, proposed your Chapter 13 plan in good faith, and made your best effort to comply.
Filing for bankruptcy can be time-consuming, and the process can feel overwhelming. If you believe bankruptcy is the right option for you, familiarize yourself with the steps above and make the most of the required credit counseling sessions. It will help you understand how the process will affect you for years to come and hopefully help you avoid facing this situation again.