Steps to File for Bankruptcy
Bankruptcy is not simply a matter of telling a judge “I’m broke!” and throwing yourself at the mercy of the court. There is a process – a sometimes confusing, sometimes complicated process – that individuals and businesses must wade through to be successful.
How to File for Bankruptcy
It starts with compiling all your financial records – debts, assets, income, expenses – and listing them. This not only gives you a better understanding of your situation, but also gives anyone helping you (and eventually the court) a better understanding.
The next step is to receive credit counseling within 180 days before filing your case. This is required step. You must obtain counseling from an approved provider listed on the United States Courts website. Most counseling agencies offer this service online or over the phone.
The courts want you to do this to make sure you have exhausted all possibilities of finding a different way to handle your problem. It’s important to understand that credit counseling is required. You will receive a certificate of completion from the course and this must be part of the paperwork when you declare bankruptcy, or your filing will be rejected.
Next, you file the petition for bankruptcy. If you haven’t done so at this point, this might be where you realize you need to find a bankruptcy lawyer. Legal counsel is not a requirement for individuals filing for either Chapter 7 or Chapter 13 bankruptcy, but you are taking a serious risk if you choose to represent yourself.
For one thing, you may not understand federal or state bankruptcy laws or be aware which laws apply to your case, especially regarding what debts can or can’t be discharged. Judges are not permitted to offer advice and neither are the court employees involved in a case.
There also are many forms to complete and some important differences between Chapter 7 and Chapter 13 that you should be aware of when making decisions. Finally, if you don’t know and follow the proper procedures and rules in court, it could affect the outcome of your case.
When your petition is accepted, your case is assigned to a court trustee, who sets up a meeting with your creditors. You must attend the meeting, but the creditors do not have to be there. This is an opportunity for them to ask you or the court trustee questions about your case.
If you cannot afford to hire an attorney, you may have options for free legal services. If you need help finding a lawyer or locating free legal services, check with the American Bar Association for resources and information.
Types of Bankruptcy
There are several types of bankruptcy for which individuals or married couples can file, the most common being Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a chance to receive a court judgment that releases you from responsibility for repaying debts. You are permitted to keep key assets, considered “exempt” property, but “non-exempt property” will be sold to repay part of your debt.
Property exemptions vary from state to state. You may choose to follow either state law or federal law, which may allow you to keep more possessions.
Examples of exempt property include your home, the car you use for work, equipment you use at work, Social Security checks, pensions, veteran’s benefits, welfare and retirement savings. These things can’t be sold or used to repay debt.
Non-exempt property includes things like cash, bank accounts, stock investments, coin or stamp collections, a second car or second home, etc. Non-exempt items will be liquidated and the proceeds used to repay lenders.
Your assets will be sold by a court-appointed bankruptcy trustee. The proceeds go toward paying the trustee, covering administrative fees and, if funds allow, repaying your creditors as much as possible.
Chapter 7 is the most popular form of bankruptcy, making up 63 percent of individual bankruptcy cases in 2015.
Chapter 13 Bankruptcy
Chapter 13 bankruptcies make up about 30 percent of non-business bankruptcy filings. A Chapter 13 bankruptcy involves repaying some of your debts to have the rest forgiven. This is an option for people who do not want to give up their property or do not qualify for Chapter 7 because their income is too high.
People can only file for bankruptcy under Chapter 13 if their debts do not exceed a certain amount. The specific cutoff is reevaluated periodically, so check with a lawyer or credit counselor for the most up-to-date figures.
Under Chapter 13, you must design a three- to five-year repayment plan for your creditors. Once you successfully complete the plan, the remaining debts are erased.
However, most people do not successfully finish their plans. When this happens, debtors may then choose to pursue a Chapter 7 bankruptcy instead. If they don't, creditors then can resume their attempts to collect the full balance owed.
Different Types of Bankruptcy
- Chapter 9: This applies only to cities or towns. It protects municipalities from creditors while the city develops a plan for handling its debts. This typically happens when industries close and people leave to find work elsewhere. There were 20 Chapter 9 filings in 2012, the most since 1980. Detroit was among those filing in 2012, and is the largest city ever to file Chapter 9. Detroit’s GDP shrunk by 12.2% in the 10 years prior to declaring bankruptcy. The average major metro growth in that time was 13.1%.
- Chapter 11: This is designed for businesses. Chapter 11 is often referred to as “reorganization bankruptcy” because it gives businesses a chance to stay open while they restructure the business’ debts and assets so it can pay back creditors. This is used primarily by large corporations like General Motors, Circuit City and United Airlines, but can be used by any size business, including partnerships and in some rare cases, individuals. Though the business continues to operate during bankruptcy proceedings, most of the decisions are made with permission from the courts.
- Chapter 12: Chapter 12 applies to “family farms” and “family fishermen” and gives them a chance to propose a plan to repay all or part of their debts. The court has a strict definition of who qualifies and it’s based on receiving regular annual income as a farmer or fisherman. Debts for individuals, partnerships or corporations filing for Chapter 12 can’t exceed $4.03 million for farmers and $1.87 for fishermen. The repayment plan must be completed within five years, though allowances are made for the seasonal nature of both farming and fishing.
- Chapter 15: Chapter 15 applies to cross-border insolvency cases, in which the debtor has assets and debts both in the United States and in another country. This chapter was added to the bankruptcy code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act. Chapter 15 cases start as insolvency cases in a foreign country and make their way to the U.S. Courts to try and protect financially troubled businesses from going under. The U.S. courts limit their scope of power in the case to only the assets or persons that are in the United States.
Consequences of Bankruptcy
The overriding principle of bankruptcy is that it gives you a fresh start with your finances. Chapter 7 (known as liquidation), wipes away debt by selling nearly all your possessions. Chapter 13 (known as the wage earner’s plan) gives you an opportunity to develop a 3-5 year plan to repay all your debt and keep what you have.
Both equal a fresh start.
Bankruptcy remains on your credit report for 7-10 years, depending upon which chapter of bankruptcy you file under. For example, Chapter 7 (the most common) is on your credit report for 10 years, while a Chapter 13 filing (second most common) is there for seven years.
During this time, a bankruptcy discharge could prevent you from obtaining new lines of credit and may even cause problems when you apply for jobs.
If you are considering bankruptcy, your credit report and credit score probably are damaged already. Your credit report may not endure significantly more damage, especially if you consistently pay your bills after declaring bankruptcy.
Still, because of the long-term effects of bankruptcy, some experts believe it’s most beneficial when you have more than $15,000 in debts.
Where Bankruptcy Doesn't Help
Bankruptcy does not necessarily erase all financial responsibilities.
It does not discharge the following types of debts and obligations:
- Federal student loans
- Alimony and child support
- Debts that arise after bankruptcy is filed
- Some debts incurred in the six months prior to filing bankruptcy
- Taxes
- Loans obtained fraudulently
- Debts from personal injury while driving intoxicated
It also does not protect those who co-signed your debts. Your co-signer agreed to pay your loan if you didn't or couldn't pay. When you declare bankruptcy, your co-signer still may be legally obligated to pay all or part of your loan.
Other Options
Most people consider bankruptcy only after they pursue debt consolidation or debt settlement. These options can help you get your finances back on track and won't negatively impact your credit as much as a bankruptcy.
Debt consolidation combines all your loans to help you make regular and timely payments on your debts. Debt settlement is a means of negotiating with your creditors to lower your balance. If successful, it directly reduces your debts.
To learn more about bankruptcy and other debt-relief options, seek advice from a local credit counselor or read the Federal Trade Commission's informational pages.