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Filing for Bankruptcy

When a person is deep in debt, there is often the thought to simply file for bankruptcy, which allows many debts to be forgiven and provides a fresh start. However, bankruptcy is a black mark on the credit history that lasts seven years and prevents consumers from getting loans or mortgages, decreases the credit score, and in some cases can prevent him or her from getting a job. There is always the option to simply allow the debt to expire, so how should you know if bankruptcy is right for you and which form of bankruptcy to pursue?

What is bankruptcy?

Bankruptcy is a federal court procedure in which you state that you have no money, or that the value of your debt is larger than the value of your assets. It is an option for both consumers and businesses, but this page focuses on the process of bankruptcy for individual consumers, which can be accomplished by filing with Chapter 7 or Chapter 13 bankruptcy.

How does filing for bankruptcy shield me from debt, and what sort of debts are covered by it?

The presiding court issues an automatic stay, a protective order that attempts to prevent creditors from contacting you or initiating collection activity. Not all creditors cooperate and stop calling or sending you mail right away, but many do when they learn, usually from you, that you have filed for bankruptcy. They can bother you, but you are safe from lawsuits in which a court can order you to pay the creditors with penalties. The court, at some point, might lift the automatic stay and enable creditors to pursue the repayment of debt.

In general, bankruptcy can force creditors to forgive credit card debt, other loans, mortgages and hospital bills. Child support, alimony, and taxes are not forgiven. Student loans are not forgiven either, though in many cases they can be delayed if you can prove that paying them creates an undue hardship.

What are the differences between Chapter 7 and Chapter 13 bankruptcy?

The essential difference is based on your ability to repay the debt in the future. Chapter 7 is considered liquidation and is designated for people who are likely to be unable to repay their debt in the future. With Chapter 7, you may be forced by the court to sell some of your assets to settle the debt. Chapter 13 is considered reorganization and is the lesser damaging filing of the two. It allows you to format payment plans to gradually reduce your debt over a given period of time. If the debtor has a steady income, Chapter 13 might be the only available option aside from simply allowing the debt to expire. Debt that is eligible to be forgiven through bankruptcy usually expires after seven or eight years.

What are the rules that govern whether or not I qualify to file for Chapter 7 bankruptcy?

If your income is higher than a certain amount, you are not eligible. The amount changes on an annual basis and the requirement is based on your state’s median income, which differs from state to state. Any income you receive from work, investments, pension, worker’s compensation, annuities or state disability insurance is considered. Tax refunds and Social Security retirement benefits are not considered. If your income is equal to or lower than your state’s median income, you are eligible to file for Chapter 7 bankruptcy. If it is higher, you still may be eligible but it depends on how much disposable income you have left after paying qualified monthly expenses such as rent, food, and electricity.

I recently filed for bankruptcy. Can I do it again?

You are not eligible to file for Chapter 7 or Chapter 13 bankruptcy if you have had a bankruptcy case dismissed in court within the last 180 days in any state, according to federal law.

How do I know if I will qualify for bankruptcy or if my case will be dismissed?

You must participate in credit counseling with a nonprofit that is approved by the office of the United States Trustee. That is something that is not only within the interest of the government but in your own best interest. Credit counseling is inexpensive and often free, and you are welcome to visit our page on credit counseling for more details. The credit counselor will help you to determine whether there is a better way to settle your debt or if filing for bankruptcy is the best option, and if so, which form of bankruptcy to file. There are certain exceptions to the law, which include disability, mental incapacity, or deployment by the military in a combat zone.

Bankruptcy may also not be an option for you if you attempted to defraud creditors by transferring assets to another person, if you destroyed your own property willfully to reduce its value, if you have knowingly lied on a credit application, or if you have recently purchased qualifying luxury items.