Bankruptcy

What Is Bankruptcy?

Bankruptcy is a request to a court to provide relief when you are unable to pay your debts. It may offer you a fresh start if you can no longer afford to pay your bills. For example, you may be having trouble making payments for all or some of the following: 

• Home 
• Car or other vehicles 
• Credit card balances 
• Medical bills 
• Utility bills 

When you get too far behind on payments, such as on loans you received to buy a home or car, a creditor may be able to take them back. For any type of unpaid bill, whether it’s an installment payment for a loan or a monthly bill for utilities, debt collectors may contact you often to ask for the money you owe. Ultimately, these debt collectors could sue you in court for payment. The court could order you to pay back the money you owe in different ways. This includes taking it from your paycheck. 

Bankruptcy is a way to avoid having some of these things happen.  

Types of Bankruptcy

Most people who file for bankruptcy as an individual choose one of two types: Chapter 7 bankruptcy or Chapter 13 bankruptcy.

You may be able to get free legal services for either a Chapter 7 bankruptcy or Chapter 13 bankruptcy filing. Find out if you qualify for these services by contacting your state or territory’s LSC-supported legal aid office.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, you’re asking the court to discharge some of the debts owed before you filed for bankruptcy. “Discharging” a debt means no one can try to collect the money from you. This discharge can apply to debts like credit card balances, medical bills, and utility bills.  

For example, Chapter 7 bankruptcy could also get rid of the requirement to pay your landlord for rent payments that you missed. However, your landlord would still be allowed to evict you from your home for not paying the rent. If you own your home, you might not have to pay back any mortgage payments you missed, but your mortgage lender could still take back your home. 

For certain items, no type of bankruptcy can get rid of your responsibility to pay what you owe. For example, you usually still have to pay what you owe for taxes, alimony, or child support.  

Student loans are difficult to discharge in Chapter 7 bankruptcy, but some people are able to do it. To ask for a student loan discharge, you must file a separate request with the court called an “adversary proceeding.” In this proceeding, you are asking the court to agree that repayment of the loan would “impose undue hardship” on you and your dependents (such as a child). 

To decide whether paying the student loan debt would impose undue hardship, the court might consider: 

• If you’re forced to repay the loan, would you be unable to maintain a minimal standard of living?
• Is there evidence that this hardship would continue for a large portion of the loan repayment period? 
• Did you make good-faith efforts to repay the loan before filing for bankruptcy? 

The U.S. Department of Education provides more details on this adversary proceeding process and how it could change payments on your student loan.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is sometimes referred to as debt restructuring because after this type of bankruptcy, you’ll still have debts. “Debt restructuring” means you’ll have a new plan that lets you make smaller payments over a longer time period to pay back what you owe. Also, Chapter 13 bankruptcy could reduce the amount you owe. 

A debt restructuring plan can be particularly helpful for keeping your home, vehicles, and other items you purchased with loans. For example, homeowners may file for Chapter 13 bankruptcy to catch up on mortgage payments over a five-year period. 

Student loans are very rarely discharged in Chapter 13 bankruptcy, but the loan payments are often delayed or reduced. Talk to an attorney about how your student loan payments could be changed in a Chapter 13 case.

Ways Bankruptcy Can Help You

Bankruptcy provides some benefits. Here are some of the biggest ones: 

• Debt collectors will stop calling. As soon as you file your case with the court, almost all collection actions are stopped. This means debt collectors are not allowed to contact you while your case is active. There are a few exceptions. Debt collectors can contact you if you owe money for child or spousal support, taxes, or court-imposed fines related to a crime. 
• You can start over. Sometimes, the amount of money you owe feels overwhelming. You may not have a realistic way to catch up. With a Chapter 7 bankruptcy, you could get rid of the obligation to pay back most of your debts. 
• You may be able to keep your home. The bankruptcy will temporarily protect you from foreclosure. With a new payment plan, you may be able to catch up on your mortgage payments. 

Ways Bankruptcy Can Harm You

Bankruptcy should not be taken lightly. Here are some of the ways filing for bankruptcy can harm you: 

• It will be harder for you to get new loans or credit cards. Your credit score is based mostly on your payment history. Your bankruptcy will make that score much lower for as long as 10 years. Banks and credit unions use these credit scores to decide if they can trust you to pay back a loan or make payments on a credit card. Even if you do get new credit, the interest rates may be very high. 
• You may lose some things you own. Chapter 7 bankruptcies include a process called “liquidation.” That means some of the things you own (property) can be taken and sold without your consent to help pay off your debts. Some of your property, however, will be protected. The property that is protected can differ by state and territory, but usually you can keep your clothing, furniture, and appliances. You can also keep your home and car (or other vehicle) if you’re up to date on those payments or if your vehicle is worth less than a certain amount. In most Chapter 7 cases, you can protect only one vehicle per working adult. 
• You lose some future options for dealing with financial problems. If you file for Chapter 7 bankruptcy and don’t have to pay some of your debts, you must wait for a set time period before you can file for bankruptcy again. The waiting period is eight years for a Chapter 7 filing and four years for a Chapter 13 filing. 
• Your take-home pay may be lower. Chapter 13 payment plans often involve taking money out of your paycheck to make your new payments.  
• You lose some financial privacy. The court and a trustee assigned to your case will look over your personal finances with a fine-toothed comb. This examination happens in every bankruptcy. 

Deciding Whether To File a Bankruptcy Case

There are many things to consider before filing for bankruptcy. Here are some of them: 

• The amount of money you owe. You may want to file for Chapter 7 bankruptcy protection if you don’t think you’ll ever be able to pay back the amount you owe for things like medical bills or credit card balances. You might consider Chapter 13 bankruptcy protection if you think you can pay back what you owe if you are given more time to pay and a lower monthly payment. But you would not want to file for Chapter 13 bankruptcy protection if the money you owe on your home and car payments would be too much to pay back even with more time to pay and a lower monthly payment. 
• The type of debt you owe. Some types of debt cannot be removed through bankruptcy. Examples include alimony, overdue taxes, and child support. You want to make sure bankruptcy will get rid of enough of your debt to be worth the downsides.  
• Items you might lose if you do not file for bankruptcy. How much do you need the things that creditors or other debt collectors might take from you if you cannot pay? Collectors could also get a court judgment to have money taken out of each paycheck you receive to pay your debt to them. There is a limit on how much money can be taken from each paycheck. There are also limits on what types of things or income can be taken from you, as explained below.  
• Whether you are “judgment proof” or “collection proof.” Both terms mean the same thing: You don’t have anything for a creditor to collect, even if they sue you and win.  Federal and state laws protect certain items from debt collectors. According to Upsolve, an online tool people can use to file for Chapter 7 bankruptcy on their own, these items often include typical household goods, health aids, clothing, and a vehicle up to a certain value. Also, federal and state laws usually prohibit a creditor from taking money from certain sources of income. These income sources can include: 

• Social Security benefits. 
• Supplemental Security Income benefits. 
• Public assistance payments. 
• Unemployment benefits. 
• Department of Veterans Affairs benefits.
• Child support. 
• Federal employee and civil service retirement benefits. 

It’s a good idea to talk with an attorney or other expert adviser if you are considering filing for bankruptcy. You may be able to get free legal advice. Find out if you qualify for this free advice by contacting your state or territory’s LSC-supported legal aid office.  

Filing a Bankruptcy Case

You must take a credit counseling course no more than 180 days before filing a bankruptcy case. The U.S. Justice Department provides a list of approved credit counseling agencies. The reason you must take this course is to ensure you have considered other options before declaring bankruptcy. 

When you’re ready to file your case, you must file it at your local federal bankruptcy court. Use the Federal Court Finder tool to locate yours. 

If you’re filing for Chapter 7 bankruptcy, Upsolve is a free resource that you can use to prepare and file your bankruptcy documents. Upsolve is a nonprofit partially funded by the Legal Services Corporation (LSC).  

You’ll need to include many documents when you file your case. Here are some of the documents you must provide:

• Pay stubs or other proof of income. 
• Tax returns. 
• Bank statements. 
• Retirement account or brokerage account (stock) statements. 
• A list of your creditors — all the lenders or providers you owe money to. This list should also include money you owe to friends or family members. 
• A list of all your assets — everything you own. 

Bankruptcy Case Costs

The fees you must pay to file either a Chapter 7 or Chapter 13 bankruptcy case amount to more than $300. These fees could change, so check with the court where you plan to file.  

You may be able to pay your filing fee a little at a time instead of all at once. In some Chapter 7 bankruptcy filings, you can ask the court to cancel the fee.  

Bankruptcy cases are complicated, so you will likely need an attorney to help you. You may be able to avoid attorneys’ fees by finding an organization that provides free legal services for low-income residents, such as your state or territory’s legal aid office. If you have to pay attorneys’ fees, the cost could be thousands of dollars. 

Bankruptcy Case Length

A Chapter 7 bankruptcy case is usually quick, finishing about 60 days after the first court hearing. It ends after you receive a discharge notice in the mail. 

A Chapter 13 bankruptcy case remains open until you complete your payments under the plan. The plan can last for up to five years.