What is bankruptcy?
Bankruptcy laws in the United States are designed to help give people relief when they become overwhelmed by debts they can no longer pay, either by liquidating (i.e., selling off) assets to pay outstanding debts or structuring payment plans with creditors. Filing for bankruptcy is a legal proceeding overseen by federal courts.
What are the different types of bankruptcy filings?
The two most common types of bankruptcy filings are Chapter 7 and Chapter 13, named for the corresponding chapters of the law.
Chapter 7 bankruptcy is designed to offer filers a fresh start by eliminating their debt. The court will appoint a trustee to sell your assets, with certain exemptions. The sales proceeds are then used to pay off your debts. Any amount owed after the asset sale and payoff is discharged.
Chapter 13 filings don't require you to sell your assets. Instead, the goal of a Chapter 13 bankruptcy is to structure a payment plan over a period of three to five years with each of your creditors. Once you meet your obligations under the payment plan, your remaining debts are discharged.
Can anyone file for bankruptcy?
No. In order to file for bankruptcy, you need to demonstrate through filings and documentation that you don't have the means to repay your debts. There are statutory income thresholds for filing under Chapter 7, and debt limitations for filing under Chapter 13. If you meet the requirements to file, you will also have to go through an approved bankruptcy counseling course.
You must wait eight years after a prior Chapter 7 bankruptcy discharge in order to file again. Similarly, there is a two-year waiting period after the date of a Chapter 13 discharge in order to file for a second time.
What is bankruptcy counseling?
Federal bankruptcy laws mandate bankruptcy education for anyone who wants to file for bankruptcy 180 days before filing. The education/counseling component is designed to ensure that those filing bankruptcy petitions fully understand the process and alternatives to filing, and create a budget.
What happens when you file for bankruptcy?
The process starts by filing a bankruptcy petition in court. You are not required to hire an attorney to help you with your bankruptcy case. However, doing so can be beneficial. The required forms and process can be difficult, confusing, and time-consuming for anyone who isn't familiar with bankruptcy laws and procedures. You can prepare for the process by filling out a Bankruptcy Worksheet.
After you file your petition, the court notifies your creditors. Upon receiving notice of bankruptcy, creditors must cease collection efforts while the matter is pending. Your creditors have the right to review filings and to question you about your assets, liabilities, income, and expenses. In some cases, bankruptcy matters are disputed, which can prolong the process and add to the cost of declaring bankruptcy.
The ultimate goal of any bankruptcy proceeding is to receive a discharge of your debts. The discharge bars your current creditors from pursuing collection for the debts included in your filing. If you have questions about bankruptcy in light of COVID-19, ask a lawyer.
Does filing for bankruptcy discharge all existing debts?
No. Certain types of debt cannot be included in bankruptcies. In most cases, student loan debt cannot be discharged. In addition, bankruptcy laws will not protect you from:
- Certain debts incurred within six months of filing
- Court-ordered alimony or child support
- Federal tax liens
- Court fines and penalties
- Government penalties
It's also important to know that if you file for bankruptcy and include shared debts in your filing, your discharge will stop your creditors from coming after you but it does not eliminate the debt. This means friends or family members who signed for your loans are still on the hook for making payments.
What are the advantages of filing for bankruptcy?
Filing for bankruptcy can give you peace of mind by stopping creditor calls and letters demanding payment. This can halt utility disconnections, mortgage foreclosures, and auto repossessions temporarily, giving you some extra breathing room when you need it most.
Bankruptcy can also help you get back on solid financial footing after an illness, job loss, or other circumstances negatively impact your personal or small business balance sheet.
What are some downsides to filing for bankruptcy?
Bankruptcy filings are public proceedings. So, once you file, your assets, debts, income, and expenses are available for public scrutiny.
Because Chapter 7 filings require the sale of all non-exempt assets, you will likely lose property in the process. That can include your real estate and personal property.
In addition, after filing for bankruptcy, expect your credit rating to take a hit. It will likely be difficult (initially) to be approved for new credit cards, auto loans, or mortgages. If you are offered financing, you will likely have to pay higher interest rates than someone who has never filed for bankruptcy.
How long does bankruptcy take?
One thing you should understand if you are considering filing for bankruptcy protection is that it is not an immediate process. Chapter 7 bankruptcy cases generally take between 4-6 months to settle, while Chapter 13 filings sometimes take years to finalize.
How long does bankruptcy stay on your credit report?
If you file under Chapter 7, your bankruptcy will stay on your credit report for ten years. Filing under Chapter 13 means your credit report will reflect your bankruptcy for seven years.
This does not mean you have to wait a decade before you can obtain new credit, but it could be two or more years before you are seen as a "normal" credit risk to potential lenders.
Ask a lawyer
Filing for bankruptcy may be the right decision if your financial circumstances have dramatically changed. As with other types of legal proceedings, bankruptcies can be complex. It is important to evaluate your options and understand the potential pros and cons of filing for bankruptcy. Finally, don't be afraid to ask a lawyer when you need legal advice. For free access to key legal documents and attorney advice in light of COVID-19, check out the Rocket Lawyer Coronavirus Legal Center.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.