If you’re facing financial hardship as a result of the coronavirus pandemic, you may have considered filing for bankruptcy. It can sound like an intimidating and confusing process, given that there is a lot of misleading information out there, however with the right support, bankruptcy can be a great way to get the fresh start you need. Whether you’re facing challenges with personal or business debt, getting a clear picture of the bankruptcy process and speaking with an experienced attorney can help you determine if bankruptcy is the right solution for you.
The following information will familiarize you with the different types of bankruptcy proceedings and what you need to consider before going this route. If you have questions about managing your debt or filing for bankruptcy in light of COVID-19, you can get free legal advice in the Coronavirus Legal Center.
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Should I file for bankruptcy?
People consider filing for bankruptcy when they have faced a devastating life event, accumulation of debt, or financial loss, such as:
- Job loss
- Fleeing domestic violence
- Major disruption or closure of one’s business
- Permanent or temporary disability from an accident or illness
- Medical bills
- Death of a spouse or other family member
These events can put you in a situation where you have little or no income and your debts vastly exceed any assets you have. You also may owe more than what you can reasonably pay.
Take stock of your assets like bank accounts, retirement assets, and home equity and compare this to how much you owe in credit card debt, student debt, business loans, and any other obligations. If your debt exceeds your assets, bankruptcy may be an option, but it requires careful consideration.
Debt is a constant reality for millions of Americans. While debt can feel suffocating, bankruptcy is not an easy way out of repaying your obligations. If you’re able to repay your debts on time, you likely do not need to file for bankruptcy. Bankruptcy can also be avoided by contacting your creditors to make arrangements, or by contacting an agency to settle or consolidate your debt.
Bankruptcy is likely a viable option to give you a fresh start if your financial situation is more severe, such as:
- You are having trouble making minimum payments on your credit cards
- Your accounts have been sent to debt collectors
- Your debt payments comprise all or most of your income
- You have little or no income
What is Chapter 7 bankruptcy?
Often called liquidation or straight bankruptcy, Chapter 7 is the simplest and most popular form of bankruptcy for individuals. Here’s how it works:
- You file a petition with the local court listing your financial information, such as debts, assets, and recent transactions
- The court determines if your petition passes a “means test,” which you will automatically pass if your income is lower than your state’s median income (If your income exceeds the median, you’ll need to provide more information)
- If approved, the court assigns a bankruptcy trustee to your case
- A stay is issued so that creditors cannot make efforts to collect the debt, such as liens, eviction, or repossession
The trustee’s job is to see that your creditors are repaid by liquidating qualified property. State and federal bankruptcy codes exclude certain types of property from being liquidated, but in practice, most Chapter 7 filers keep most or all of their property after the debt is discharged. Student loans and child support in arrears (the amount past due) are usually not dischargeable. This free Bankruptcy Assistant can help you organize your financial information in preparation to file or speak with an attorney.
Note that certain businesses can also file for Chapter 7 bankruptcy. If you have questions about which type of bankruptcy is right for your business, ask a lawyer.
What is Chapter 11 bankruptcy?
Chapter 11 bankruptcy is often filed by insolvent companies. With Chapter 11, a company can stay open while the court helps restructure its debts. Large corporations are most likely to file for Chapter 11 bankruptcy, but limited liability companies and partnerships can file, as well. Individuals rarely file under Chapter 11 unless they have extremely large debts that are ineligible for Chapters 7 and 13.
The company must run several business decisions by the court and in some cases, a trustee will run the company if there is fraud or proven incompetence. The debtor can propose a restructuring plan first and the creditors must organize one if they reject the original offer.
Chapter 11 bankruptcy is a difficult and expensive process that should not be undertaken without considering other options to satisfy business debts. A bankruptcy lawyer can help you navigate the process.
What is Chapter 13 bankruptcy?
Also called reorganization or wage earner’s bankruptcy, Chapter 13 bankruptcy works similarly to Chapter 7 except that a repayment plan is structured over a three or five-year period. It is also a good option if you do not qualify for Chapter 7 or want to keep property that would otherwise be liquidated. If you are facing foreclosure, Chapter 13 is most likely to let you keep your home.
You must have a regular income, such as a salary or Social Security, to qualify for Chapter 13 bankruptcy. Your debt also must fall below federal limits, which is currently $394,725 in unsecured debt and $1,184,200 in secured debt.
After you file your petition:
- A repayment plan is drafted
- You must attend a meeting with your creditors and receive credit counseling
- If your plan and petition are approved, you must follow through with your repayment plan
- Your remaining debt is discharged at the end of the repayment period
Will filing for bankruptcy ruin my credit and cause other problems?
People often fear that bankruptcy will ruin their lives. While it can adversely impact your credit score in the short term, you can work toward rebuilding your finances. While wiped debts will remain on your credit report for seven to 10 years (and Chapter 7 proceedings are public record for 10 years), these negative marks can lose magnitude over time.
If you are considering filing for bankruptcy, you need to know your options, so that you can make the best financial decisions for your present and foreseeable future. Visit the Coronavirus Legal Center for access to free legal advice and documents to help you prepare for bankruptcy proceedings and to determine what other relief might be available to you and your family during this challenging time.