How To File for Bankruptcy: 8 Steps
If you’ve fallen on hard times and can’t pay your debts, one option may be to file for bankruptcy. Bankruptcy is a legal process that allows you to get out of debt and start over.
In 2022, there were a total of 387,321 bankruptcies filed compared to 413,616 the previous year. This represents a six percent drop in bankruptcy filings.
But before you decide to file for bankruptcy, it’s important to understand the different types of bankruptcy and how they work.
Read more: What Is Bankruptcy: A Complete Guide
There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is also known as liquidation bankruptcy because it involves the sale of your assets to pay off your debts.
Chapter 13 bankruptcy is also known as reorganization bankruptcy because it allows you to reorganize your finances and repay your debts over time.
We look at what happens when you file for bankruptcy, the steps involved, and how much is it to file for bankruptcy.
Types of Bankruptcy
There are a total of six bankruptcy types, which is Chapter 7, 9, 11, 12, 13, and 15. Chapter 7 and Chapter 13 bankruptcy are by far the most popular among individual filers in the US.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is generally the most popular option as it’s ideal for people on a low income or those without many assets.
If you’re successful with a Chapter 7 bankrupty you may be able to clear your debts. You may also keep some assets that the court deems exempt. The rest of your property will be sold to settle your debt (or part thereof).
Some people don’t qualify for Chapter 7 bankruptcy because they have a high income, or simply because they can’t afford the expenses and fees.
To file for Chapter 7 bankruptcy, you must complete a means test to see if you qualify. If you do qualify, you’ll need to complete a number of forms and file them with the court.
You’ll also need to attend a meeting of creditors, where your creditors will have an opportunity to object to your discharge or repayment plan.
By the end of Chapter 7 bankruptcy you most or all of your debt will be cleared. Some debts that won’t be cleared include child support and alimony, as well as some student loans and unpaid taxes.
This form of bankruptcy remain on your credit profile for 10 years but you can immediately start improving your score over time and rebuild your finances.
Chapter 13 Bankruptcy
With a Chapter 13 bankruptcy, you have to repay some debts will others will be forgiven. This makes it ideal for those who do not qualify for Chapter 7 or those who don’t want to surrender all their property.
To qualify for Chapter 13 bankruptcy, you have to earn less than $465,275 in debt that is unsecured, and less than $1,395,875 in debt that is secured.
To file for Chapter 13 bankruptcy, you must file a number of forms with the court. You’ll also need to create a repayment plan that outlines how you’ll repay your debts over three to five years.
You must also create a five-year repayment plan for your creditors and once that plan is complete, the remaining debts are cleared from your name.
Filing for Bankruptcy: Step-By-Step Guide
Filing for bankruptcy can be complex and confusing, so it’s important to seek out the advice of an attorney to make sure you follow the process correctly.
Here are the steps to file for bankruptcy:
Steps
Review Your Options
Consider whether filing for bankruptcy is the best course of action before making the decision. Although filing for bankruptcy won’t make all of your bills disappear, it will stop creditors from debiting your account.
Remember that certain debts, including as taxes, alimony, and student loans, cannot be discharged.
There are alternatives to bankruptcy, such as credit counseling and debt consolidation. You might try to make more money to pay off your debt, depending on your financial condition, or you could restructure your mortgage.
To assist in paying off your debts, you can alter your way of living or reduce your monthly spending.
Start by picking the appropriate type of bankruptcy if you can’t avoid doing so.
Choose the Type of Bankruptcy
Chapter 7 and Chapter 13 are the two types of bankruptcy that someone can petition. The debtor’s assets are sold in a Chapter 7 bankruptcy, commonly referred to as a “liquidation” bankruptcy, to pay creditors.
A repayment plan is made by the debtor in a Chapter 13 bankruptcy, commonly referred to as a “reorganization” bankruptcy, to pay creditors over time.
Your specific financial circumstances will determine which bankruptcy filing is best for you. It is crucial that you discuss your options with a knowledgeable bankruptcy lawyer who can explain the benefits and drawbacks of each type of bankruptcy in order to help you make this choice.
An attorney can also help you to determine which type will better protect your assets and allow you to get back on your feet financially.
Hire an Attorney
Considering how difficult it may be to file for bankruptcy, it’s critical to have an experienced lawyer on your side.
When you engage with a lawyer to file for bankruptcy, they can guide you through the process and make sure all of your documentation is in order. If necessary, they can even act as your legal representative.
The first step if you’re considering filing for bankruptcy is to speak with a qualified lawyer who can guide you through the procedure.
Attend Credit Counselling
Pre-bankruptcy counseling and post-bankruptcy counseling are the two different kinds of credit counseling. You can better comprehend the bankruptcy process and its implications for your financial future with the aid of pre-bankruptcy counseling.
Additionally, it provides you the chance to make any last-minute adjustments to your finances, including consolidating loans or paying off debt.
You can create a budget and make plans for your financial future after bankruptcy with the aid of post-bankruptcy counseling.
You must attend credit counseling before you can file for bankruptcy. The credit counselor will go over your finances with you and help you develop a budget.
The counselor will provide you with the necessary certification to file for bankruptcy if they believe it is the best course of action for you.
You must go to post-bankruptcy counseling if you want to file for bankruptcy. Once your bankruptcy has been discharged, the court will usually demand that you provide this.
The advisor will work with you to create a budget and make plans for your post-bankruptcy finances.
File the Paperwork
It’s time to apply for bankruptcy if you’ve already gathered all the required documentation. Actually, the procedure is quite straightforward: all you have to do is submit a petition to the court and pay the filing fee.
The court will notify your creditors that you have filed for bankruptcy after you have submitted your petition.
A trustee will be chosen by them to manage your case as well.
You must now appear in court for a hearing when the judge will either dismiss your case or exonerate you.
If your case is dismissed, you’re still in charge of making your debt payments. If you receive a discharge, it indicates that you are no longer required by law to pay back your obligations.
Once you’ve received a discharge, your creditors are no longer permitted to pursue debt collection. It’s vital to speak with a lawyer before presuming that all of your debts have been erased because there are some exceptions to this rule.
Meet with Creditors
Meeting with your creditors is one of the first things you should do if you’re thinking about filing for bankruptcy. This is also referred to as a 341 meeting.
It can be a difficult undertaking, but it’s crucial to keep in mind that your creditors are not your adversaries. They are just companies that owe money.
The main aim of this meeting is to verify your identity, and discuss your financial situation. Your creditors may get the opportunity to ask you some questions and to discuss a repayment plan.
The date and time of your 341 meeting will be provided on the notice you receive from the court.
An attorney can help you understand your rights and obligations under bankruptcy laws and can assist you in negotiating with your creditors.
Debtor Education
The court will force you to finish a debtor education course when you file for bankruptcy. You will learn how to manage your finances and stay out of debt in this course.
Usually, your filing fees include the cost of the course.
The debtor education course must be finished within 180 days of your bankruptcy filing. The U.S. Trustee’s Office must authorize the course before it can be taken online, in person, or over the phone.
You will obtain a certificate of completion once you have finished the debtor education course, which you must submit to the court.
Debt Discharge
The legal procedure by which a debtor’s duty to pay back a debt is eliminated is known as a debt discharge. The majority of debts are dismissed in a Chapter 7 bankruptcy, usually referred to as a straight bankruptcy.
However, some debts, including child support, alimony, some taxes, and student loans, are not forgiven in a Chapter 7 bankruptcy.
The debtor must submit a petition to the court and appear in court for the discharge of a debt during bankruptcy.
The court will subsequently issue an order for the debt to be discharged. The creditor is then forcibly restrained from taking any further steps to pursue the debtor for payment.
It’s crucial to consult a lawyer if you’re thinking about declaring bankruptcy to find out which sort of bankruptcy is best for you and to make sure that all of your debts will be erased.
What Debts Can Be Forgiven?
Although bankruptcy does not remove all your financial obligations, there are some debts that may be completely forgiven:
| Debts That Can Be Forgiven | Debts That Cannot Be Forgiven |
|---|---|
| Credit card debt | Federal student loans |
| Medical bills | Child support and alimony ordered by the court |
| Phone bills | Debts that are made after filing for bankruptcy |
| Unpaid utilities | Fraudulent loans |
| Most attorneys’ fees | Some taxes |
| Collection agency accounts | Debts from malicious injury to property or others |
How Long Does Bankruptcy Stay On My Credit Report?
Bankruptcy will stay on your credit report for up to 10 years, but this does not mean that you will be ineligible for credit during this time.
After filing for bankruptcy, you could still be able to obtain a mortgage, auto loan, or another sort of finance. After receiving your discharge, it’s important to start repairing your credit as soon as possible.
There are a few things you can do to help improve your credit score after bankruptcy:
- Get a secured credit card.
- Use your credit card responsibly and make all payments on time.
- Keep your balances low.
- Try to get a mix of different types of credit, such as an installment loan or revolving line of credit.
- Check your credit report regularly and dispute any errors you find.
Read more: How To Improve Your Credit Score
Alternatives To Bankruptcy
There are a few alternatives to bankruptcy that can help you get your finances back on track.
Debt Consolidation
Debt consolidation involves taking out a new loan to pay off existing debts. This can be a good option if you can find a loan with a lower interest rate than what you’re currently paying.
Credit Counseling
A credit counselor can help you develop a budget and negotiate with creditors to lower interest rates or waive fees.
Debt management
With a debt management plan you can pay off all your high-interest debt and get your finances under control with budgeting and planning.
Debt Settlement
Debt settlement is an agreement you make with a creditor to get a reduced payment as a full settlement of the account. Keep in mind that debt settlement can also damage your credit similar to bankruptcy.
Summary
Filing for bankruptcy can be a difficult decision to make, but it is often the best option for those who are struggling to manage their debt.
The process can be complicated, but with the help of a bankruptcy lawyer, you can navigate the process and get your finances back on track.
If you are considering filing for bankruptcy, we encourage you to contact a bankruptcy lawyer to discuss your options and figure out what is best for you.
FAQs
If you file for bankruptcy can you keep your car?
Your car might be kept if you declare bankruptcy. But this will depend on a few things, such how much your automobile is worth and whether your payments are current.
You might be eligible to exempt your car from the bankruptcy estate if you are current on your car payments and it is worth less than a specific amount (which varies by state). You may continue to drive your car as a result.
Your car could, however, be repossessed or sold to pay off your creditors if you are falling behind on your payments or if its value exceeds the exemption threshold.
Talk to an experienced bankruptcy attorney in your state to find out if you will be able to keep your car if you file for bankruptcy.
Does bankruptcy affect my taxes?
There are many reasons why people may file for bankruptcy. Some people may have amassed a large amount of debt that they are unable to pay off, while others may have experienced a significant financial setback such as a job loss or medical emergency.
Whatever the reason, filing for bankruptcy can provide relief from creditors and help individuals get back on their feet fina
Generally speaking, declaring bankruptcy has no tax repercussions. However, a bankruptcy trustee may withhold any tax refund you are anticipating in order to pay creditors. In Chapter 7, this can only occur once, however it can occur every year of your repayment plan in Chapter 13.
How much debt should you have to file for bankruptcy?
In most cases, you will need to have at least $10,000 in debt in order to file for Chapter 7 bankruptcy. If you have less than this amount, you may still be able to file for Chapter 13 bankruptcy.
When determining how much debt you should have before filing for bankruptcy, it is important to keep in mind that this number is just a general guideline.
Your specific situation may warrant filing for bankruptcy even if your debt is below the $10,000 threshold. If you are unsure whether or not you should file for bankruptcy, it is always best to consult with an experienced bankruptcy attorney who can help you determine if filing is right for you.
How much debt should you have to file bankruptcy?
There is no minimum amount of debt required to file for Chapter 7 bankruptcy.
What is the downside of filing for bankruptcy?
Bankruptcy remains on your credit for 10 years. You may find it hard to get approved for credit after a bankruptcy but you can rebuild your credit over time.
Can I get a credit card after bankruptcy?
While you’re in your bankruptcy proceedings you’ll need a court order to apply for new credit. This process can take anywhere from a few months to five years or more.
Sources
- National Bankruptcy Forumaccessed on May 29, 2023
- United States Courtsaccessed on May 29, 2023
- United States Courtsaccessed on May 29, 2023
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