[UNITED STATES] Filing for bankruptcy is a significant decision that can have long-lasting effects on your financial future. While it may seem like a daunting process, understanding the steps involved can help you make an informed choice and navigate the proceedings more confidently. This comprehensive guide will walk you through the process of filing for bankruptcy, focusing on the two most common types for individuals: Chapter 7 and Chapter 13.
Bankruptcy is a legal process designed to help individuals and businesses overwhelmed by debt to get a fresh start. As Scott Glatstian, an attorney at Rosenblum Law, explains, "Bankruptcy is an amazing tool provided by the government to help anyone struggling with their debt. Once the proceedings are complete, the person filing for bankruptcy is going to be in a position to rebuild their credit and move on from this difficult period in their lives."
Before diving into the specifics of filing, it's crucial to understand the two main types of bankruptcy available to individuals:
Chapter 7 Bankruptcy: Also known as "liquidation bankruptcy," this option is best for those with primarily unsecured debt who can't pay it back. It involves selling non-exempt assets to pay off creditors.
Chapter 13 Bankruptcy: Often called the "wage earner's plan," this option is for those with a steady income who can pay back at least part of their debt over time through a structured repayment plan.
When to Consider Bankruptcy
While bankruptcy should not be taken lightly, there are situations where it might be the best solution. Derek Jacques, an attorney and principal owner of The Mitten Law Firm, suggests considering bankruptcy if:
- Creditors are suing you as a last-ditch effort to recover their money
- You're facing wage garnishment
- You have overwhelming medical debt
- You have a significant amount of unsecured debt that you can't repay1
Steps to File for Bankruptcy
Step 1: Credit Counseling
Before you can file for bankruptcy, you must complete a credit counseling course from an approved provider. This requirement is mandated by the Department of Justice and is designed to help you understand your financial situation and explore alternatives to bankruptcy.
Step 2: Determine Which Chapter to File
Based on your financial situation and the results of your credit counseling, you'll need to decide whether to file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy:
- Best for those with mostly unsecured debt (credit cards, personal loans, medical bills)
- Quicker process (usually 4-6 months)
- May require liquidation of non-exempt assets
- Must pass the means test (income below state median or limited disposable income after expenses)
Chapter 13 Bankruptcy:
- Suitable for those with a steady income who can pay back some debt
- Allows you to keep assets like your home or car
- Involves a 3-5 year repayment plan
- No means test required, but debt limits apply
Step 3: Gather Financial Documents
Collect all relevant financial documents, including:
- Tax returns
- Pay stubs
- Bank account statements
- Credit reports
- Asset information
Step 4: Complete Bankruptcy Forms
Fill out the required bankruptcy forms, which include:
- Schedules A/B through J (Official Forms 106 A/B – J)
- Statement of Financial Affairs (Official Form 107)
- Chapter-specific forms (e.g., Chapter 7 Statement of Current Monthly Income or Chapter 13 Calculation of Disposable Income)
Step 5: File the Petition
Submit your completed forms to the bankruptcy court along with the filing fee. As of 2023, the fees are:
Chapter 7: $338 ($245 case filing fee, $75 administrative fee, $15 trustee surcharge)
Chapter 13: $310 ($235 case filing fee, $75 administrative fee)
You may be able to pay these fees in installments or have them waived if your income is below 150% of the federal poverty guidelines.
Step 6: Automatic Stay
Once you file, an automatic stay goes into effect. This legally prohibits most creditors from continuing collection efforts, including lawsuits, wage garnishments, and even phone calls.
Step 7: Appointment of Trustee
The court will appoint a bankruptcy trustee to oversee your case. The trustee's role varies depending on whether you file Chapter 7 or Chapter 13.
Step 8: Meeting of Creditors (341 Meeting)
You'll need to attend a meeting with the trustee and any creditors who choose to appear. This meeting, also known as the 341 meeting, typically occurs 21 to 50 days after filing. You'll answer questions under oath about your financial situation and bankruptcy forms.
Step 9: Financial Management Course
Complete a debtor education course, which is required before your debts can be discharged.
Step 10: Debt Discharge or Repayment Plan
For Chapter 7: If there are no objections and you've met all requirements, you'll receive a discharge order, typically 60 to 90 days after the 341 meeting.
For Chapter 13: You'll need to submit a repayment plan within 14 days of filing your petition. The court must approve this plan, and you'll start making payments to the trustee within 30 days of filing, even if the plan hasn't been approved yet.
Considerations When Filing for Bankruptcy
Hiring an Attorney vs. Filing Pro Se
While it's possible to file for bankruptcy without an attorney (pro se), the process can be complex. Nathan J. Brelsford, an attorney and founder of Azeros Legal, advises, "It's possible to file a Chapter 7 pro se — without an attorney. In that case, check your applicable bankruptcy court's website for help and forms. Some bankruptcy courts offer a self-help center to help guide pro se debtors."
However, given the complexity of bankruptcy law, especially for Chapter 13 cases, hiring an experienced bankruptcy attorney can be beneficial. Attorney fees typically range from $1,500 to $3,000 for Chapter 7 and $3,000 to $5,000 for Chapter 13.
The Means Test for Chapter 7
To qualify for Chapter 7 bankruptcy, you must pass the means test. This test compares your income to the median income in your state. If your income is below the median, you automatically qualify. If it's above, you'll need to show that you don't have enough disposable income to repay your debts after accounting for allowed expenses.
Asset Exemptions
In Chapter 7 bankruptcy, certain assets may be exempt from liquidation. These exemptions vary by state but often include:
- A portion of home equity
- Personal property up to a certain value
- Retirement accounts
- Tools of the trade
Impact on Credit
Bankruptcy will remain on your credit report for 7-10 years, which can make it challenging to obtain credit in the short term. However, many people find that their credit scores begin to improve shortly after bankruptcy as their debt-to-income ratio improves.
Alternatives to Bankruptcy
Before filing for bankruptcy, consider these alternatives:
Debt Settlement: Negotiate with creditors to pay less than what you owe. Some debt settlement companies claim to reduce debt by up to 50%.
Debt Management Plans: Work with a credit counseling agency to create a plan to repay your debts over time, often with reduced interest rates.
Debt Consolidation: Take out a new loan to pay off multiple debts, potentially at a lower interest rate.
Negotiating with Creditors: Try to work out payment plans or settlements directly with your creditors.
Filing for bankruptcy is a serious decision that requires careful consideration. While it can provide relief from overwhelming debt, it also has long-lasting consequences. By understanding the process and your options, you can make an informed decision about whether bankruptcy is the right choice for your financial situation.
Remember, bankruptcy is not the end of your financial journey, but rather a new beginning. As Scott Glatstian notes, "Once the proceedings are complete, the person filing for bankruptcy is going to be in a position to rebuild their credit and move on from this difficult period in their lives."
Whether you choose to file for bankruptcy or pursue an alternative debt relief option, the key is to take action. Facing your financial challenges head-on is the first step towards regaining control of your financial future.
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