Filing for bankruptcy can be a fresh start for debtors who are struggling to keep up with their finances, but the consequences are serious. If you declare bankruptcy, you can expect a long-lasting negative impact on your credit report, and you may have to sell some of your assets to repay your creditors.
Still, filing for bankruptcy may be the best way to get out of debt and improve your financial situation depending on circumstances. Keep reading to learn when you should consider filing for bankruptcy.
Bankruptcy is a legal process through which a debtor seeks court-ordered relief for debts they cannot repay. The court may discharge the debt or order you to pay it back, depending on which chapter of bankruptcy you file:
Chapter 7 bankruptcy is known as a â€śliquidation bankruptcyâ€ť because the courts discharge your debts and sell off your nonexempt assets to repay your creditors. Nonexempt assets depend on the state you live in, but they may include valuables, cash, savings, investments, a second car or a vacation home.
Chapter 13 bankruptcy is known as a â€śwage earnerâ€™s planâ€ť because itâ€™s aimed toward debtors with a regular income who earn too much to file Chapter 7. In this form of bankruptcy, the courts help the debtor come up with a plan to repay all or part of their debts.
Bankruptcy is designed to help consumers regain control of their finances. You might consider filing for bankruptcy ifâ€¦
Chapter 7 and Chapter 13 bankruptcy can give you a fresh start after dealing with insurmountable debt, but thereâ€™s a reason why itâ€™s treated as a last resort. See some of the biggest drawbacks of bankruptcy below, but keep in mind that they may not outweigh the immediate need for substantial debt relief:
If you have insurmountable debt, contact your creditors first. They may be able to enroll you in a hardship program to temporarily halt payments, lower your monthly minimum payment or eliminate any late fees, for instance.
Nonprofit credit counseling agencies may be able to negotiate with creditors on your behalf and set you up on a debt management plan. This is a fairly common alternative to bankruptcy for people who are struggling to repay their debt.
Medical debt is a common reason to file for bankruptcy, but it might not be your best option. See if youâ€™re eligible for medical debt forgiveness through your health care provider before filing for bankruptcy for this reason.
If you own nonexempt assets or have a significant amount of money in savings, youâ€™re liable to lose that when filing for Chapter 7 bankruptcy. Most Chapter 7 cases filed by individuals are â€śno assetâ€ť cases, meaning all the debtorâ€™s assets are exempt or they donâ€™t have assets.
The U.S. Courts recommend hiring a qualified attorney to deal with bankruptcy matters, but notes that itâ€™s possible to file without one. This is called filing pro se.
To file bankruptcy without an attorney, youâ€™ll need to familiarize yourself with the U.S. Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, as well as any local bankruptcy laws in your area. In general, youâ€™ll have a better chance filing on your own if your case is simple and youâ€™re filing Chapter 7.
Hereâ€™s how to file bankruptcy yourself:
Step 1: Determine whether youâ€™re eligible for Chapter 7 by filling out the relevant means test forms. If youâ€™re not eligible, youâ€™ll have to file Chapter 13, which is easier done with the help of a qualified attorney.
Step 2: Seek credit counseling. Youâ€™re required to enroll in a financial management course through an accredited credit counselor and fill out the relevant documents certifying your completion.
Step 3: Fill out the bankruptcy forms. These are available on the U.S. Courts website free of charge. If youâ€™re filing as an individual or a married couple, youâ€™ll use the forms that are numbered in the 100 series. Check your local courtâ€™s website to see what documents may be required in your area.
Step 4: File a Chapter 7 petition. From here, your case will be scheduled. The filing fee for Chapter 7 bankruptcy is $335.
Step 5: Attend a 341 meeting. During this meeting of creditors, youâ€™ll be asked questions under oath about your financial situation.
Step 6: Meet the requirements outlined by the courts. If youâ€™re successful, your case will be closed within a few months and your debts may be discharged.
When you file bankruptcy through an attorney, the process is much simpler than filing yourself. You donâ€™t have to worry about bankruptcy forms and legal codes â€” youâ€™ll just have to come prepared with your financial information, such as:
A qualified attorney will serve as your advocate throughout the bankruptcy process. Find a bankruptcy attorney in your area through your state or local bar association.
Many bankruptcy attorneys offer free or low-cost consultations. Book consultations with a few bankruptcy attorneys so you can choose which oneâ€™s best fits your unique situation. Be sure to ask the bankruptcy attorney about their fee structure and qualifications, but also find an attorney youâ€™re comfortable working with â€” youâ€™ll be seeing a lot of them over the course of a few months.
Keeping up with debt payments can be overwhelming, particularly for people with multiple credit cards, loans and lines of credit. If youâ€™re struggling to repay debt and juggle more than a few bills, then you could consider debt consolidation.
Debt consolidation is when you take out a loan or credit card and use it to repay other debts, with the goal of saving money, lowering your monthly payments or paying off debt faster. For this to be successful, your new financial product should have a lower APR than what youâ€™re currently paying on your debts. See some common ways to consolidate debt in the table below:
|4 ways to consolidate debt|
|Balance-transfer credit card||
|Debt consolidation loan||
|Home equity loan||
Credit counseling is a financial education and debt management service thatâ€™s typically offered through a nonprofit agency. Credit counselors can teach you about personal finance and budgeting, and they can also set up a debt management plan with your creditors.
When you enter a debt management plan, a credit counselor works on your behalf to negotiate with your creditors and repay your debts over three to five years. Your credit counselor may be able to negotiate the amount of your debt and your APR, and they may be able to get fees reduced or waived as well. This type of plan may come with a startup fee and monthly cost, though these may be waived or reduced depending on your circumstances.
If you decide to declare bankruptcy, then youâ€™ll be required to attend pre-bankruptcy counseling with a certified credit counselor.
Debt settlement is when you hire a company to negotiate with your creditors with the goal of getting your debts reduced or eliminated. Debt settlement companies charge a service fee, but the results arenâ€™t guaranteed. Plus, debt settlement companies charge a fee for a service that you may be able to do yourself â€” you can try to negotiate your own debt settlement.
Some creditors may be willing to cut a break on past-due accounts to avoid going through the expensive and lengthy process of getting a court judgment to collect your debt.
Follow these steps to negotiate your own debt settlement:
Settling a debt can have a negative impact on your credit score, and this mark will remain on your credit report for seven years.
Each bankruptcy chapter has its own set of eligibility requirements. To file for Chapter 7 bankruptcy, you need to make below your stateâ€™s median income or pass a means test. To file for Chapter 13 bankruptcy, your debts must be below a certain amount.
After you file Chapter 7 bankruptcyâ€¦
After you file Chapter 13 bankruptcyâ€¦
Filing fees are $335 for Chapter 7 bankruptcy and $310 for Chapter 13 bankruptcy. However, thatâ€™s just a portion of the cost of filing for bankruptcy. Youâ€™ll likely also have to pay attorney fees, as well as any costs associated with pulling your credit reports or tax transcripts.
Chapter 7 bankruptcy generally takes about four months to complete, while Chapter 13 bankruptcy lasts until youâ€™ve finished your repayment plan, typically three to five years.
The most tangible effect of bankruptcy is the impact it would have on your credit score. Your score will likely see a significant drop, particularly if youâ€™re entering bankruptcy with a good credit score. Bankruptcy stays on your credit report for seven to 10 years.
If you file Chapter 7 bankruptcy, you also risk losing nonexempt assets, such as valuable items, savings accounts, investments, a second car or a second home. These assets can be liquidated to repay your creditors.