Bankruptcy isn’t fun, but it’s an opportunity to learn, reflect, and regroup. This guide can help you get familiar with the basics, the bankruptcy process, and determine the best course of action for your situation. Our clients resolving to move forward often tell us how much less daunting the experience is than they’d imagined. Get in touch with us when you’re ready and we’ll help you explore your options in greater detail.
Personal Bankruptcy Basics
Bankruptcy is a court procedure that helps both consumers and businesses get rid of their debts and repay their creditors. During the bankruptcy, the bankruptcy court protects the consumer or the business from his/her/their creditors with a rule called the “automatic stay,” which is a kind of restraining order against creditors’ collection efforts. One of the primary purposes of bankruptcy is to discharge certain debts and to give an honest individual debtor a “fresh start.”
All bankruptcy cases are handled in federal courts and are controlled by rules laid out in the US Bankruptcy Code.
How do I know if filing bankruptcy is right for me?
There isn’t an easy way to determine this. The easiest way to figure this out is to go and talk to a reputable credit counseling agency or to a bankruptcy attorney to see what your options are. If you are unable to pay your debts, bankruptcy may be your best option, but you should consider all options before filing for bankruptcy protection. There are long term legal and credit implications, so you should make sure you fully understand those before you decide to file bankruptcy. The easiest way to do this is to discuss your situation with a bankruptcy lawyer.
What types of debts are involved in a bankruptcy?
Secured Debts v. Priority Unsecured Debts v. General Unsecured Debts
A secured debt occurs when you are extended credit based on your ability to pay and the creditors ability to seize the property you posted as collateral for the debt should you default. The most common type of secured debt is your car loan or your mortgage.
Priority debts are those debts that have priority for payment over other debts. These typically include recent income tax debts, domestic support obligations (i.e., child support and spousal support) and restitution owed via court order.
An unsecured debt is all other debts besides secured debt and priority debts. It often occurs when you are extended credit based solely on an evaluation of your ability to pay the creditor back, such as credit cards or personal loans. Other examples include medical bills and student loans.
What types of debts are wiped out by a bankruptcy?
The general rule is that debts are discharged (wiped out) by a bankruptcy. However, there are many, many exceptions to that rule. For example, most student loans are non-dischargeable in bankruptcy, as well as child and spousal support arrears, recent income tax debts, and debts incurred by fraud. Your bankruptcy attorney will be able to advise you about which of your debts cannot be discharged.
The Bankruptcy Petition
Bankruptcy begins with the filing of a packet of paperwork called a “petition” with the Bankruptcy Court. The petition for all types of bankruptcy are virtually identical, but there are a few differences.
The Bankruptcy Petition includes the following:
- A schedule of your assets and the fair market values of those assets
- A list of all of your creditors, with the amount owed and the nature of any claims they could make;
- A schedule of executory contracts and unexpired leases;
- A schedule of current income and expenditures;
- A statement of financial affairs;
- A certificate of credit counseling (and a copy of any repayment plan developed during the credit counseling, if any);
There are set forms for the petitions available online with the bankruptcy court in your jurisdiction.
Other required documents include:
- Your tax returns from the prior year and any tax returns that are filed during the bankruptcy must be provided to the trustee; Evidence of wages from any and all employers for the 60 days prior to the petition being filed; and
- The source, amount, and frequency of your income
Are there fees associated with filing the petition?
There currently is a filing fee of $335 for a Chapter 7 bankruptcy and $310 for a Chapter 13 bankruptcy. The fee amounts are adjusted every three years, so check with the Court or an attorney for the current amounts. This fee must typically be paid in full when you file, however you can request to pay the fee in installments. The court can only allow for four installments (so $83.75/installment), but all installments must be paid within 180 days of filing the petition. If you fail to pay the amount due, your petition can be dismissed. If your income is less than 150% of the poverty level and you cannot afford the fee, then the court can waive the fee entirely.
Chapter 7 Bankruptcy
The idea behind Chapter 7 is to allow you to discharge your eligible debts and gives you a fresh financial start. Your primary concern in your Chapter 7 petition is to retain your exempt property and receive a discharge that covers as many of your debts as possible.
The Chapter 7 bankruptcy trustee will liquidate any of your assets that are not protected by exemptions and and use those funds to pay your debts. Under the Bankruptcy Code, some of your property is considered exempt from being liquidated or taken from you to pay your debts. So, you must file with your petition a schedule outlining your “exempt” property. Most people find that all or nearly all of their assets are protected by exemptions and are not liquidated. However, it is important that you speak with a bankruptcy attorney in your state to determine what property you are eligible to claim as exempt.
Chapter 7 Eligibility
First, you must pass the means test to determine if you are eligible to file.
Second, you must undergo credit counseling within 180 days before filing your petition.
How Chapter 7 Works
Once the petition is filed, the automatic stay is put into place. This means that your creditors can no longer initiate or continue lawsuits, wage garnishments, or telephone calls demanding payments. The Court will notify your creditors that you have filed a Chapter 7 petition.
Once the petition is filed, then the Trustee will hold a hearing called the
“Meeting of Creditors.” This is typically scheduled about 30 to 45 days after the petition is filed. During this meeting, you will be put under oath and questioned by the trustee and your creditors. Within 10 days of that meeting, the trustee will report to the Court whether or not it is a genuine bankruptcy and is not an abuse of the system.
How does a Case Trustee work?
Once you file your petition, an “estate” is created and the estate becomes the temporary legal owner of all of your non-exempt property.
The Chapter 7 trustee is appointed by the Court and his/her job is to administer the estate and liquidate your non-exempt assets. He/she must liquidate your assets in a way that maximizes the return to your creditors.
The trustee then pays your creditors, in order of their claim, from the nonexempt property of your estate. Your creditors are put into six classes by the trustee, based on their claims. Each class must be paid in full before the next class can get paid.
Chapter 7 Discharge
The main purpose of the Chapter 7 bankruptcy is to receive a discharge of your debts. The discharge is a court order that releases you from personal liability for the discharged debts and prevents your creditors from taking any further action against you for those discharged debts.
- Some debts cannot be discharged in Chapter 7 bankruptcy. Non-dischargeable debts include: spousal support, child support, certain taxes, almost all student loans , debts for willful or malicious injury that you caused, and certain criminal restitution orders. There are some debts that your creditor must file a petition with the court to have their debt declared as nondischargeable.
- Your Chapter 7 Discharge is subject to a multitude of exceptions, so it is important that you talk to an attorney so that you fully understand the scope of what the discharge means prior to filing the discharge.
- Typically 99% of Chapter 7 cases receive a discharge.
- The discharge order typically comes within 60-90 days after you have your first meeting with your creditors. You can be denied a discharge but typically these will only happen if you lie or commit fraud. Your discharge can be revoked if a creditor, the trustee, or the court can establish that you obtained your discharge by lying or fraud.
- Reaffirmation of the Debt
If you wish to keep certain secured property (such as your vehicle), you can make the decision to reaffirm the debt. Reaffirmation of the debt is basically a waiver of the bankruptcy discharge as to that particular debt. When you reaffirm the debt, you enter into an agreement with your creditor wherein you agree to remain liable for the debt you are trying to discharge. Your creditor then agrees to not repossess the property so long as you continue to pay. However, you should consult with an attorney prior to making this decision.
If you decide to enter into a reaffirmation agreement, you have to do this prior to the discharge being entered. The agreement must be in writing and you must file it with the court. You are entitled to an extensive set of disclosures prior to signing this agreement. Part of this disclosure is you file a statement of your current income and expenses because you have to prove to the court that your income is sufficient to pay the reaffirmed debt. If the court believes that your income is insufficient then the court can elect to not approve the agreement.
Chapter 13 Bankruptcy Petition
The easiest way to understand Chapter 13 Bankruptcy is to think of it as a way to get back on track with the payments you have fallen behind on. If you have a regular source of income, Chapter 13 allows you to develop a plan to pay some or all of your debts. This plan usually lasts anywhere from 3 to 5 years, but cannot exceed 5 years. Basically, a Chapter 13 bankruptcy acts like a consolidation of all of your debts. You make payments to the Chapter 13 trustee, who distributes the payments to your creditors.
Advantages of Chapter 13
- You don’t necessarily have to give up your property like you do in a Chapter 7. You get the chance to consolidate your debts and extend them over the life of the Chapter 13 plan.
- Your cosigner might be protected under a Chapter 13 petition, however you should consult with an attorney prior to filing to fully understand this protection.
- Chapter 13 can allow you to save your home. If you are in foreclosure, filing a Chapter 13 Petition will stop the foreclosure and can allow you to cure the payments you have fallen behind on. Please understand that you are required to make your regular mortgage payments during the plan in addition to the plan payments.
- You will not be contacted by your creditors while your Chapter 13 petition is pending.
Are you eligible for Chapter 13?
- You can file a Chapter 13 petition if your unsecured debts are less than $394,725 and your secured debts must be less than $1,184,200. These amounts are adjusted every three years, so check with an attorney for the current numbers.
- The same credit counseling requirement exists for Chapter 13 that exist for Chapter 7.
Chapter 13 Plan
- Within 14 days of filing your petition you must file your repayment plan. The repayment plan is submitted to the court and must provide for regularly fixed payments. The trustee will then distribute those payments to your creditors for often less than full payment of the creditors’ claims. Your plan must pay your priority creditors in full.
- If you want to keep your collateral your plan must ensure that the creditor that holds that note be paid at least the value of the collateral. Homes and cars are treated slightly differently and will depend on your situation. It is incredibly important that for your secured creditors you speak with a bankruptcy attorney so that you fully understand what the plan must entail and what will happen to the collateral once your bankruptcy is complete.
For unsecured creditors, they are not entitled to be paid in full over the life of the plan. Instead, your disposable income will be paid over the life of the plan and that creditor will receive what the trustee disburses to them. The unsecured creditor is entitled to receive at least what they would have received had you filed a Chapter 7 and liquidated your assets.
Understand that you have to make the plan work. You are required to make the payments to the trustee, which means that you are committing to living on a fixed budget for the next 3 to 5 years. This ensures that you can keep the property that you have and get back on track. You are not allowed to incur any more debt during the life of your plan without getting permission from the trustee or the judge.
- If you fail to make your payments your case can be dismissed and you are no longer protected by the automatic stay imposed by your petition. Your case may also be converted to a Chapter 7 petition. There is a $25 fee for the conversion of the plan from Chapter 13 to Chapter 7.
- For convenience, you can make plan payments via payroll deductions, which means that it automatically comes out of your check and you don’t have to think about it.
Chapter 13 Procedure
- The Petition for Chapter 13 is very similar to the Petition for Chapter 7.
- Once the petition is filed, a Chapter 13 case trustee is appointed to administer the case. The trustee will collect your payments, disburse the payments to your creditors, and evaluate your case. The automatic stay goes into place against the majority of your creditors.
- Within 30 days of the petition being filed, whether or not your plan has been approved, you must start making payments to the trustee.
- About a month after the petition is filed, the trustee will hold a hearing called the “Meeting of Creditors”, where you will have to answer questions under oath. Both your creditors and your trustee will be able to question you in regards to your financial affairs and the proposed plan. Your bankruptcy judge will not be there.
- Around 30 to 45 days after the initial meeting of the creditors, your bankruptcy judge will hold a confirmation hearing and decide whether or not he/she will confirm your plan. Your creditors will receive notice and will have the opportunity to object to confirmation of your plan.
- If the judge confirms your plan, then the trustee will start to distribute funds that he/she has received under the plan almost immediately.
- If the judge declines to confirm your plan, then you will have to file a modified plan. If your modified plan is also not confirmed, then the court can dismiss the case. If your case is dismissed, then any plan payments that have not been disbursed will be returned to you.
Discharge under Chapter 13
The law surrounding a Chapter 13 discharge is incredibly complex and has undergone several major shifts, thus, it is incredibly important that you talk to a competent attorney who is well-versed in bankruptcy. A Chapter 13 discharge is somewhat broader than a Chapter 7 discharge, and more debts can be discharged. Please consult an attorney.
- You are entitled to a discharge under Chapter 13 once all of your payments are made so long as you:
Certify that all of your spousal support and child support obligations (if any) have been paid to date;
- You have not received a prior discharge from a different Chapter 13 petition within the last 2 years (for Chapter 7, 11, and 12, it is a discharge within the last 4 years);
- You have completed an approved course in financial management.
The discharge releases you from all debts that were included in the plan, except for those debts that cannot be discharged. If your creditor was paid in full or part, he/she/it may no longer initiate or continue legal action against against you to collect on the discharged debt.
For certain debts, such as your mortgage or possible restitution orders, you are still liable for the debts. While you are back on track in terms of making payments, you must continue to make your normal payments on these items.
There is a Chapter 13 Hardship Discharge. It is possible that once the plan is confirmed, something could happen in your life that would prevent you from completing your plan. At this point you can request that the court grant you a hardship discharge. This discharge is limited and should be discussed with an attorney. This type of discharge is typically only available if:
- Your inability to complete the plan is due to “circumstances beyond your control and through no fault of your own;”
- Your creditors have received as much as they would have received if you had filed a Chapter 7 petition; and
- Modification of the plan is impossible.
What happens to my credit after I file for bankruptcy?
Bankruptcy will absolutely cause your credit score to fall quite drastically. The exact amount is hard to pinpoint. However, over time the impact of your bankruptcy diminishes. It takes time to rebuild your credit, but it certainly can be done. When trying to rebuild your credit, it is important that you remember the counseling you received and do so smartly and slowly.
How do I build a more stable financial future after bankruptcy?
Having a fresh start can help you turn the page on old habits and be a great way to form new ones. Most people aren’t particularly enthusiastic about managing their financial affairs. For those with an aversion there are excellent ways to automate payments, and setup alerts that will notify you if account balances are too low to cover payments. Technology can be an excellent support system for reducing the time and energy required to stay organized, out of debt, and paying your bills on time to build credit. Furthermore, there are companies such as Simple, a company Lifehacker called “banking 2.0” back in 2013, which gamify banking to such a extent customers report actually having fun using their products. Banks like Simple, or alternately Moven, automate the tediousness, create goals out of all the fun stuff like saving for trips, and have specific categories like safe-to-spend to strip the guilt out of frivolous spending. You can further simplify with Google Wallet, Apple Pay, or Samsung Pay to make transactions easier. With further automation like direct deposit and “bill pay” you can ensure your credit score will steadily gain ground without having to watch it like a hawk.
Can I ever buy a house or car after filing?
Yes, you can buy a house or car after filing bankruptcy. However, there are credit ramifications from filing that should be discussed with an attorney prior to you filing. A bankruptcy will stay on your credit report for 7 years from the date the petition was filed for a successful Chapter 13 and 10 years from the date the petition was filed for a Chapter 7 bankruptcy.
What is credit counseling?
At the very least, during this credit counseling, you will go take a deep dive into your personal finances, discuss alternatives to bankruptcy, and develop a personal budget plan. These sessions usually last about an hour and can cost approximately $20 to $50. Waivers are available if you cannot afford to pay. Once the session is complete, you will get a certificate to include with your petition. These sessions can be done in person, over the phone, or online.
During the course of your bankruptcy, you will undergo a second counseling course, called “Debtor Education.” During this course, you will likely develop a budget, learn how to responsibly use credit, and how to manage your money. Your session will cost between $20 and $50 and will last about 2 hours. Again, the course can be done online, in person, or over the phone.
Please only use agencies that are listed on the following website:
Do I have any options other than filing bankruptcy?
Depending on what your finances look like, what type of debts you have, and what your financial goals are, an alternative to bankruptcy may be in your best interest. Some of the possible alternatives to declaring bankruptcy are covered in this section.
Negotiate with your creditors
If you have available income or property that you can liquidate, you might want to consider negotiating directly with your creditors. Sometimes it is better to settle debts at a discounted rate or enter into an affordable payment plan than it is to file bankruptcy. Remember that your creditors want to get paid, negotiating with them ensures that they get some, if not all, of their money. And for you, those negotiations might also be an easier and less invasive alternative to bankruptcy.
Enter into a debt management program
A debt management program is basically a less formalized Chapter 13 Bankruptcy, wherein a credit counseling agency helps you to develop a plan to pay back some or all of your creditors over a period of time. This type of program is preferable to filing bankruptcy because then you don’t have a bankruptcy on your credit report. While not having a bankruptcy on your credit report is great, by entering into a debt management plan you don’t get the protection of the bankruptcy court. For example, if you miss a payment in a Chapter 13 repayment plan, you are protected from further collections actions, however if you miss a payment during a debt management program, your creditors could start collections against you. Further, for Chapter 13 filers, you usually only end up repaying a portion of your debts and the rest get discharged. In a repayment plan you will usually pay your debts in full.
It is also important to note that choosing a credit counseling agency should not be entered into lightly. There are many scam programs out there. It is safest for you and your money to chose a credit counseling agency that has been approved by the United States Trustee (www.usdoj.gov/ust) or one that is associated with the National Foundation for Credit Counseling (www.nfcc.org).
You might be judgment proof. While it is uncomfortable to think about, you might have such little income and virtually no property that there is nothing for your creditors to take – this makes you judgment proof. There is no recourse for your creditors and doing nothing might be in your best interests.
What do I do after I file bankruptcy?
Stay in contact with your attorney and be transparent with him/her, the trustee, and the court. Prepare yourself for the questions and have a solid support system. Bankruptcy can be emotionally draining and hurtful, but remember that you could get a clean slate when you are done and be put back on track once it is over.
Should I hire a lawyer?
The shortest answer to this question is, YES, you should hire a lawyer for your bankruptcy filing. Bankruptcy is complex and can be difficult to navigate, so it is in your best interests to hire a bankruptcy attorney who can help guide you through the process. Bankruptcy also has long-term financial and legal consequences a lawyer can help you ensure you fully understand.
However, you can file bankruptcy without an attorney, or pro se. If you opt for this route, it is recommended that you do in-person credit counseling from a reputable agency who can guide you through the process.