What You Should Know About Filing for Bankruptcy

Find out about bankruptcy chapter choices, pitfalls to avoid, life after bankruptcy, and more.

By , Attorney · University of the Pacific McGeorge School of Law

Filing for bankruptcy will get your finances back on track. Still, the rules can be complicated if you don't understand the bankruptcy process. The following are some of the things to know about bankruptcy before filing:

  • what bankruptcy is
  • the differences between bankruptcy chapters 7 and 13
  • what to do—and not do—before filing, and
  • what to expect during and after bankruptcy.

Also, 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?

Filing for bankruptcy is serious business. It erases debt and helps you get back on your financial feet fast. But, you could lose property, and bankruptcy can impact your credit score for up to ten years, so filing won't make sense unless you can get rid of a good amount of debt.

You'll find the things you should know about filing for bankruptcy below.

You Should Know the Differences Between Chapter 7 and Chapter 13 Bankruptcy

You know there are three primary bankruptcy chapters, Chapter 7, 13, or 11, but if you're like most people, you don't remember what each does. Here are the basics.

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.

The takeaway? You'll likely file for Chapter 7—possibly Chapter 13.

You Should Know Which Bankruptcy Chapter Is Right for You

Not all debt problems are the same. Different chapters solve different issues, so we've outlined the key points below to help you understand how each bankruptcy type works.

Tip for Business Owners: Most businesses don't file for Chapter 7, and companies can't file for 13. Instead, consider Chapter 11 or Chapter 11 subchapter V for small businesses. Also, be sure you understand that a personal filing could negatively affect your company and any partners. Learn more about businesses in bankruptcy.

You Should Know What to Do Before Bankruptcy

Preparing to file for bankruptcy involves a lot of steps. The first? Find out if you qualify by taking the Chapter 7 means test. Or calculate your Chapter 13 repayment plan and determine if you can afford it. In either case, you might need the help of a bankruptcy lawyer.

Next, check if bankruptcy will wipe out your debts. 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, figure out whether you can keep your property. 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. Here's where you learn about the property you can protect in bankruptcy.

We explain each of these steps in more detail below.

You Should Know If You Can Erase Your Bills in Bankruptcy

Before you do anything else, check whether bankruptcy will wipe out (discharge) your debt. Credit card balances, medical bills, personal loans, back rent, gym memberships, payday loans, and utility bills get discharged in bankruptcy.

You Should Know If You Can Keep Your Property in Bankruptcy

Everyone needs essential belongings to work and live. Although you won't lose everything in bankruptcy, you don't choose what to keep. Your state lists the items bankruptcy filers can protect in its bankruptcy exemption laws. However, some states let filers use the federal bankruptcy exemptions if they'd protect more property.

You Should Know If You Qualify for Bankruptcy

Sometimes it's easy to figure out whether you're qualified for bankruptcy. For instance, Chapter 7 debtors qualify if their gross income is less than the state's median income for the family's size. It's just a matter of simple math and checking 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.

You Should Know What Not to Do Before Bankruptcy

Don't be dishonest. Don't talk to debt collectors. Don't hide or transfer property for less than what it's worth. Don't pay dischargeable debts with funds you can protect in bankruptcy (such as 401k 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.

You Should Know What Happens During Bankruptcy

After you file, the automatic stay will stop most creditors from collecting from you. The court will set a date for the 341 meeting of creditors—the one appearance all filers must make. (In Chapter 13, you or your lawyer must also go to a confirmation hearing where the judge determines 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's management course, and Chapter 13 filers will complete the repayment plan. That's it!

You Should Know What Happens After Bankruptcy

Most filers feel significant relief after receiving a discharge. But a discharge comes with costs. The downsides of bankruptcy include having difficulty opening a bank account, leasing a home, and buying a car for a year or two after the filing. So planning for these needs is essential before you file your case.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

Downloadable Copies of Bankruptcy Forms

Chapter 7 and 13 Bankruptcy Forms

Chapter 7 Bankruptcy Document Checklist

More You Might Like

How Does Chapter 7 Work?

How Does Chapter 13 Work?

What Debts Can I Erase in Bankruptcy?

What Property Can I Keep When I File For Bankruptcy?

What's Involved in the Chapter 7 Bankruptcy Process?

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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