If you can no longer juggle your monthly bills, if you’re losing sleep worrying about debt, or if you’ve stopped answering the phone because you’re afraid another bill collector is calling, it may be time to think about filing for bankruptcy protection.
For most people, bankruptcy is a scary concept. It conjures up images of deadbeats, failures and people who have been wildly irresponsible. But plenty of people face bankruptcy for reasons that are completely beyond their control, including job layoffs, medical expenses, divorce and collapsing real estate values.
Bankruptcy can free you from worrying about your debts and provide a much-needed fresh financial start. But it costs money to file bankruptcy, and it will impact your credit for up to 10 years.
Here’s how the process works, and some things to consider as you evaluate whether bankruptcy is a good option for you.
How to file bankruptcy
To file bankruptcy, you must submit a petition to the U.S. Bankruptcy Court in the federal judicial district where you live. The petition will list your assets, such as cars, houses and bank accounts. It will also identify all your creditors and the amounts you owe them, and it will include a list of your monthly income and expenses. You’ll also need to submit a copy of your most recent tax return.
Before filing the petition, you must complete a credit counseling class.
You can have an attorney prepare the petition for you, or you can obtain forms and instructions on the U.S. Courts website.
What happens when you file bankruptcy?
Filing a bankruptcy petition automatically stays your creditors’ claims against you. This means that your creditors have to stop trying to collect the money you owe them. They cannot phone you, repossess your car or foreclose on your home.
Your case will be assigned to a bankruptcy trustee, who is a lawyer that will oversee your case. The trustee will send notices to your creditors and schedule a hearing.
From there, the procedure depends on whether you’ve filed for protection under Chapter 7 or Chapter 13 of the federal Bankruptcy Code.
Chapter 7 bankruptcy
In a Chapter 7 bankruptcy, most of your assets will be sold and the money will be used to pay your creditors. There are certain assets—such as a limited amount of cash, clothing, household items, and a car—that you are allowed to keep, but these exemptions vary depending on the state you live in.
Once your assets are liquidated and creditors are paid, any remaining debts you owe are forgiven, or discharged.
Not everyone can file a Chapter 7 bankruptcy—your eligibility depends on whether you pass a means test. If your income is too high, you may be required to file a Chapter 13 bankruptcy instead.
Chapter 13 bankruptcy
If you can’t file a Chapter 7 bankruptcy, or if you have some money to pay creditors and there are assets that you want to keep, a Chapter 13 bankruptcy may be an option for you.
In a Chapter 13 bankruptcy, you will develop a plan for making payments to your creditors over a three to five-year period, depending on your income. After you have made all your payments on time and completed a budget counseling course, the remainder of your debt that is eligible for discharge will be erased.
Chapter 13 is a good option for someone with a steady income who has some money left over every month to make debt payments, but who needs some breathing space and extra time to get caught up.
Should I file bankruptcy?
Here are some questions to ask yourself:
Do you owe more than you can pay? If your monthly payments exceed your take-home pay, you’re a potential candidate for bankruptcy.
Can you pay your debts down to a manageable level by moving or selling some of your possessions? It can be hard to confront downsizing from your dream home or getting rid of a car you love, but taking these difficult steps could allow you to pay off debts and avoid a bankruptcy filing. And if you file Chapter 7 bankruptcy, you’ll likely lose these assets anyway.
Can you work out a payment plan and resolve the debt without filing bankruptcy? Contact each of your creditors and see if they are willing to negotiate a lower balance and/or lower monthly payments.
Will a bankruptcy filing resolve your debts? Some debts, such as student loans, cannot be discharged in bankruptcy.
Most people take their financial obligations seriously and want to pay their debts in full, but knowing when to file bankruptcy and when to negotiate or use another strategy can help put you on the road to financial health.
If you are financially under water and considering filing for bankruptcy, find out what your options are with a free confidential evaluation by a participating law firm.