What You Should Know About Filing for Bankruptcy

Bankruptcy is a court process that can erase qualifying debt and stop creditors from collecting, but it can cost you property and affect your credit score for up to ten years. Before you file, you’ll want to know:

• what bankruptcy is
• the differences between bankruptcy chapters 7 and 13
• whether you qualify, what debts you can erase, and what property you can keep
• what to do—and not do—before filing, and
• what to expect during and after bankruptcy.

Be sure to read the frequently asked questions after each section. They’re the questions people search for regularly online, so you’ll probably find what you want to know when filing for bankruptcy.

What Is Bankruptcy?

Bankruptcy is a federal court process that erases (discharges) qualifying debt and stops most collection efforts. It can help you get back on your feet fast, but you could lose property, and filing won’t make sense unless you can eliminate a significant amount of debt.

Chapter 7 vs. Chapter 13 Bankruptcy: What’s the Difference?

Chapter 7 erases qualifying debt in about three to four months without requiring payments to creditors, while Chapter 13 lets you keep your property and catch up on missed payments through a three- to five-year repayment plan. Most people file one of these two. A third chapter, Chapter 11, is used mainly by businesses.

If you can’t afford to pay anything to creditors, you’ll probably prefer Chapter 7. It erases qualifying debt without requiring payments to creditors. Chapter 13 works for filers who earn enough to make payments over three to five years and can help filers stop foreclosure or repossession. Chapter 11 is similar to Chapter 13 but is expensive and used mainly by businesses. (11 U.S.C. § 727; 11 U.S.C. § 1322(d).)

Which Bankruptcy Chapter Is Right for You?

Chapter 7 usually fits if you have limited income and little property to lose, and Chapter 13 usually fits if you have steady income and need to keep property or catch up on missed payments. Different chapters solve different issues, so the key points below will help you see how each one works.

Tip for Business Owners: Most businesses don’t file for Chapter 7, and companies can’t file for Chapter 13. Instead, consider Chapter 11 or Subchapter V of Chapter 11 for small businesses. Also, you should understand that a personal filing could negatively affect your company and any partners. Learn more about businesses in bankruptcy. (11 U.S.C. § 109(e).)

Do You Qualify for Bankruptcy?

You qualify for Chapter 7 if your gross income is at or below your state’s median for your family size or, if it’s higher, you pass the second step of the means test. Chapter 13 requires regular income and debt within the chapter’s limits. For Chapter 7, it’s simple math and a chart. If you don’t pass that first hurdle, you’ll have a second chance to figure in your expenses, but more factors come into play. (11 U.S.C. § 707(b); 11 U.S.C. § 109(e).)

What Debts Can You Erase in Bankruptcy?

Bankruptcy erases most unsecured debt, including credit card balances, medical bills, personal loans, back rent, gym memberships, payday loans, and utility bills. It won’t erase everything, so check this before you do anything else. (11 U.S.C. § 523.)

What Property Can You Keep in Bankruptcy?

You can keep property protected by your state’s bankruptcy exemptions. In Chapter 7, the trustee sells what’s left. In Chapter 13, you keep everything but pay creditors the value of what an exemption doesn’t cover. Everyone needs essential belongings to work and live, so you won’t lose everything, but you don’t choose what to keep. Your state lists the items bankruptcy filers can protect in its bankruptcy exemption laws, and which state's list you use generally depends on where you’ve lived for the past two years. However, some states let filers use the federal bankruptcy exemptions if they’d protect more property. (11 U.S.C. § 522.)

What to Do Before Filing for Bankruptcy

Start by finding out whether you qualify, then check that bankruptcy will wipe out your debts, and finally figure out whether you can keep your property. The first step? Take the Chapter 7 means test. Or calculate your Chapter 13 repayment plan and determine if you can afford it. Either way, you might need a bankruptcy lawyer.

Next, you’ll be in good shape if the bulk of what you owe consists of credit card balances, medical bills, and personal loans. Otherwise, you’ll want to learn about nondischargeable debt, or obligations you can’t erase in bankruptcy.

Finally, remember that Chapter 7 filers lose assets not covered by a property exemption. Chapter 13 filers can keep all property but must pay for anything an exemption doesn’t protect. Getting this step wrong can be costly because while many can protect everything they own, it’s not always the case.

You’ll also complete a credit counseling course within 180 days before filing and gather your paperwork, such as recent pay stubs, your latest tax return, bank statements, and a list of your debts and property. The court filing fee is $338 for Chapter 7 and $313 for Chapter 13. You can ask to pay in installments, and low-income Chapter 7 filers can ask the court to waive the fee. (11 U.S.C. § 109(h); 28 U.S.C. § 1930.)

What Not to Do Before Filing for Bankruptcy

Don’t be dishonest. Don’t talk to debt collectors. Don’t hide or transfer property for less than its value. Don’t pay dischargeable debts with funds you can protect in bankruptcy (such as 401(k) or other ERISA-qualified retirement funds). Avoiding these things will help you steer clear of some of the biggest mistakes people make before filing for bankruptcy. (11 U.S.C. § 548; 11 U.S.C. § 727(a).)

What Happens During Bankruptcy?

After you file, the automatic stay immediately stops most creditors from collecting from you, and you attend one meeting of creditors, called the 341 meeting. The court will set the date. (In Chapter 13, you or your lawyer must also attend a confirmation hearing where the judge decides whether to approve your repayment plan.) You’ll provide the trustee with documents before the 341 hearing (or file them with the court, depending on your jurisdiction).

At the 341 hearing, the trustee checks identification and asks questions about your paperwork, which you’ll answer under oath. Creditors can appear and ask questions, too, but they rarely do. After the meeting, all filers will complete a debtor education course, and Chapter 13 filers will complete the repayment plan. That’s it! (11 U.S.C. § 362; 11 U.S.C. § 341.)

What Happens After Bankruptcy?

After bankruptcy, the discharge wipes out your qualifying debt, and your credit can begin to recover. Most filers feel significant relief after receiving a discharge. But a discharge comes with costs. The downsides of bankruptcy include difficulty opening a bank account, leasing a home, and buying a car for a year or two after filing. So planning for these needs is essential before you file your case. (11 U.S.C. § 524.)

Next Steps

Bankruptcy works best when you have enough dischargeable debt to justify filing, qualify for the chapter you need, and can protect your property with exemptions. Researching online is a great way to learn about the bankruptcy process, but a bankruptcy lawyer is best positioned to advise you on your options. In the meantime, you might enjoy the following:

• How Does Chapter 7 Work?
• How Does Chapter 13 Work?
• What’s Involved in the Chapter 7 Bankruptcy Process?