How To File For Bankruptcy: A Step-By-Step Guide

Bankruptcy is a rigorous, multistep process that permanently alters your financial situation. Here’s what you need to know about how to file for bankruptcy and whether it might be right for you and your financial well-being.

What Is Bankruptcy?

Bankruptcy is a legal process intended for individuals, businesses, or organizations that cannot repay their debts. It provides them with an opportunity to eliminate or restructure their debts under the supervision of a court. The primary goal of bankruptcy is to offer financial relief to debtors overwhelmed by their financial obligations.

When an individual or entity files for bankruptcy, they declare their inability to meet their financial obligations and seek legal protection from their creditors. The process involves a court identifying the debtor's assets, liabilities, and available means to repay the debts. Then, depending on the type of bankruptcy and the jurisdiction, the court may oversee the sale of the debtor's assets to repay the creditors or create a repayment plan that allows the debtor to repay their debts over time.

Debts That Can’t Be Discharged In Bankruptcy

Remember, bankruptcy doesn’t mean all of your debts vanish. Some debts can be discharged, which means the debtor is no longer liable to pay back that debt. While courts discharge certain debts, such as credit cards or medical bills, they can’t discharge every type of debt, including the following:

• Government debts for fines and penalties
• Student loans
• Mortgages, auto loans, and other secured debts
• Child support and related legal fees
• Alimony
• Payments for an ex-spouse or child due to divorce or separation
• Personal injury expenses from drunk driving

What Are The Different Types Of Bankruptcy?

The three most widespread types of bankruptcy are Chapter 7, Chapter 11, and Chapter 13. The following descriptions define which type best suits different circumstances.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most common option for individuals in debt. Also called a liquidation bankruptcy, this process sells any property the court designates as nonexempt, such as investments and second homes. Your primary home is generally exempt from sale.

In Chapter 7 bankruptcy, the court appoints a trustee to oversee the sale of nonexempt assets and distribute the proceeds to the creditors. At the end of the bankruptcy procedures, your debts are discharged (aside from the ones outlined above).

Remember, an automatic stay goes into effect upon filing, prohibiting creditors from pursuing collection actions against the debtor while the bankruptcy resolves. In addition, once the process is complete, creditors are legally banned from pursuing further payments.

Chapter 13 Bankruptcy 

Chapter 13 bankruptcy, also known as "reorganization bankruptcy" or "wage earner's plan," allows individuals with regular income to create a repayment plan to settle their debts over three to five years. It allows debtors to restructure their finances and catch up on missed payments while keeping their assets.

In Chapter 13 bankruptcy, the debtor submits a repayment plan to the court, outlining how they intend to repay their debts. The plan typically involves making consistent payments to a trustee tasked with distributing the funds to creditors according to the plan's terms. The repayment plan is based on the debtor's disposable income, which is the income left after deducting necessary living expenses and lasts three to five years in most cases.

To be eligible for Chapter 13 bankruptcy, individuals must have a stable income that allows them to make the proposed payments. In addition, their total unsecured (such as credit card debt or medical bills) and secured debts must be less than $2,750,000.

Once the court approves the repayment plan, it disallows creditors from pursuing collection actions against the debtor. If the debtor has made all the required payments at the end of the repayment period, the court typically discharges any remaining eligible debts.

Chapter 13 bankruptcy offers several advantages over Chapter 7 bankruptcy, including the opportunity to catch up on missed mortgage or car payments, protecting nonexempt assets from liquidation, and consolidating and managing debts more effectively.

Chapter 11 Bankruptcy

Although Chapter 11 bankruptcy is primarily associated with businesses, individuals with substantial debts can also use them and reorganize their finances this way.

Chapter 11 bankruptcy allows individuals to propose a plan to restructure their debts and repay creditors over time. It allows debtors to continue their operations or maintain their assets while working towards a financially viable plan. This type of bankruptcy is typically more complex and costly than other bankruptcies, and it involves greater involvement from the court and creditors.

Individuals who file for Chapter 11 bankruptcy must meet specific eligibility requirements, including having sufficient income and debts exceeding the limits of Chapter 13 bankruptcy. In addition, the debtor must submit a reorganization plan to the court, which outlines how they intend to restructure their debts, repay creditors, and manage their financial affairs moving forward.

Pros And Cons Of Filing For Bankruptcy 

Bankruptcy is a massive financial decision best made only after considering the implications and the rest of your options. Here’s a side-by-side comparison of the pros and cons of bankruptcy.

When To File For Bankruptcy  

Specific circumstances can point to bankruptcy being your best option. Here are the factors that can help you decide to file:

• Your credit card debt is out of control and continues growing. Spiraling credit card debt indicates that your income is insufficient for your debt payments. In addition, bankruptcy can discharge this debt.
• You can’t pay past medical bills over extended periods, bankruptcy can discharge the debt and give you a fresh start.
• Your personal loans have outstanding balances you can’t see yourself paying. This unsecured debt is another balance the bankruptcy court can discharge.
• Wage garnishment is inhibiting your financial capability. Bankruptcy stops garnishment in most cases and arranges a steady repayment plan, often with the help of a trustee.
• You’re at risk for foreclosure. Bankruptcy’s automatic stay will halt this process and allow you to catch up on mortgage payments.
• Other debt relief options aren’t working. If your other efforts and the help you received weren’t sufficient, bankruptcy can help after you’ve exhausted the alternatives.

How To Declare Bankruptcy: 10 Steps 

If you decide on bankruptcy, declaring it means more than filling out a document or hiring a lawyer. Here’s the process broken down into ten steps:

1. Gather Necessary Documents

The first step is to get organized by gathering the relevant financial documents. For instance, you’ll need:

• Bank statements
• Credit card statements
• Pay stubs for the past 6 months or proof of income for the last 2 years if you’re self-employed
• The last two years of tax returns
• Mortgage statements and a statement of your property’s fair market value
• Vehicle registration, insurance, and proof of value
• Retirement account statements
• Proof of alimony or child support
• Unpaid medical bills

2. Consult With An Attorney Or File Pro Se  

Next, you have a choice about how to file: with an attorney or on your own (“pro se”). The latter option means avoiding the expense of hiring a lawyer. However, this benefit comes with the risk of filing incorrectly and not knowing how to navigate court rulings. The typical bankruptcy petition doesn’t automatically protect exempt possessions, so a law professional is beneficial for that element alone, not to mention creditors can no longer attempt to collect payments after you hire a layer.

3. Complete A Credit Counseling Course

Additionally, you must prove to the court that you took a credit counseling course within fifteen days of filing for bankruptcy. Credit counseling is mandatory and will let you know if a more relaxed repayment plan would help you recover financially. Furthermore, credit counseling is required even if it's evident that bankruptcy is the only viable solution.

The counseling agency usually prepares a budget based on your income and expenses and then reviews your repayment options. Usually, the agency verifies that you don't have any realistic ways out of debt other than bankruptcy.

Remember, bankruptcy law doesn't require that you follow the plan from the credit counseling agency. That said, if the counseling agency proposes an alternative to bankruptcy, that information will appear in your court filing and may affect the court ruling.

Counseling sessions generally take 60 – 90 minutes. In addition, you can find an approved agency using the U.S. Department of Justice’s website.

4. Fill Out Your Bankruptcy Forms

After credit counseling, you’ll complete the necessary bankruptcy forms. You can find these on your local court’s website and the U.S. Trustee’s website. You must provide an exhaustive summary of your financial situation through these forms, meaning you’ll submit information regarding your income, assets, properties, executory contracts, and debts, with nothing hidden. Failing to disclose or concealing information can result in a $250,000 fine and a prison sentence of 20 years, so it’s vital to fill the forms out correctly.

5. Pay The Bankruptcy Filing Fee

A filing fee is due when you submit your paperwork. This filing fee differs for each type of bankruptcy, but typically will rank from $300 to over $1,500. Because these fees change over time, it’s best to stay updated through the U.S. Trustee’s website.

In addition, you can request that the court waives your fee if you file for Chapter 7 bankruptcy with qualifying circumstances. Specifically, if you can’t afford an installment plan and have an income below 150% of the federal poverty line, you can apply for a fee waiver.

6. File Bankruptcy Forms At The Courthouse 

If you hire a bankruptcy lawyer, they will prepare and file the bankruptcy petition electronically with the court. On the other hand, if you're filing pro se, contact your local bankruptcy court for filing information or review the court's website for instructions. For instance, your court might require you to submit the forms by mail, in person, electronically, or at a court drop box.

7. Send Documents To Your Trustee

Your bankruptcy trustee’s job is to attest to your financial circumstances and administer payments to your creditors after the court ruling. As a result, providing them with information is crucial to a streamlined bankruptcy. So, it’s best to send your trustee (which the court appoints) your tax and financial documents as soon as possible.

8. Attend A 341 Meeting With Creditors

A 341 meeting is mandatory for those filing for bankruptcy. The meeting typically happens 20 – 50 days after filing. If you file for Chapter 7, 12, or 13 bankruptcy, your trustee will run the meeting. For Chapter 11 filers, an agent from the United States Trustee will fill this role.

During the meeting, the trustee will review the debtor’s documentation. Then, the debtor answers questions about their financial situation and demonstrates that they grasp the implications of bankruptcy.

Your creditors may be present at the meeting as well to question the debtor and gather information. However, they can skip the meeting without forfeiting the right to collect payments from your trustee in the future. On the other hand, the debtor must attend the meeting. Otherwise, the trustee can dismiss the bankruptcy. Generally, 341 meetings last 15 minutes.

9. Take A Debtor Education Course

Once the 341 meeting authenticates your filing, you must take a debtor education course. Unlike credit counseling earlier in the process, this course helps debtors develop solid financial habits going forward. In addition, the step generally takes 1 – 2 hours to complete.

Fortunately, this course is affordable, and costs can be waived for debtors with an income below 150% of the federal poverty line. Plus, you can find courses online and take them on a computer at home. Once you finish the class, you’ll get a certificate within a few days confirming your completion, allowing you to move on to the final step: discharge.

10. Get Your Debt Discharge Notice 

A bankruptcy discharge is a legal directive that eliminates certain types of debts, including credit card balances, utility bills and medical debt.

In addition, when the court issues discharges for your case, you shed the legal obligation to repay the debt. Creditors can no longer contact you, send demand letters, report nonpayment to the credit bureaus, or file a lawsuit over a discharged debt.

Remember, receiving discharges means fulfilling the obligations the court places on you, including making all required payments. Once you do, the court will inform you of the discharge by sending a document known as an "order of discharge." However, it's essential to note that your case remains open until your trustee sends any remaining funds to creditors and any outstanding legal issues are resolved.

In a Chapter 7 case, the court typically issues the discharge order 3 – 4 months after filing. In a Chapter 13 bankruptcy, the discharge comes to debtors who complete the 3 – 5-year repayment plan. In both cases, the discharge eliminates qualifying debts.

Alternatives To Bankruptcy

Because bankruptcy causes severe ramifications to your finances and credit, it’s best to understand your options before making a move. Here are several other paths to take to avoid bankruptcy.

Credit Counseling 

Although bankruptcy involves a credit counseling step, you can attend credit counseling courses without filing for bankruptcy. Instead, you can seek credit counseling to help you get out of debt. Nonprofits usually provide the service for free. During the session, a credit counselor creates a financial management plan for your situation to help you start climbing out of debt.

Debt Consolidation

Debt consolidation means combining multiple loans into one loan. Doing so streamlines your payments and can help save money on interest. In addition, it allows you to merge various types of debt, such as auto loans, credit card debt, personal loans, student loans, and payday loans, into one consolidated loan.

When consolidating, it’s best to find a loan with a lower interest rate, which can result in cost savings as you pay off your remaining debt. For instance, say you have a personal loan with a remaining balance of $15,000 and a 10-year term at a 15% interest rate. Additionally, you have $4,000 in credit card debt with a 20% interest rate. By consolidating these debts with a loan with a lower interest rate, you could save a significant amount in interest payments, especially if the new interest rate is lower than that of your existing debts.

People often opt for debt consolidation loans to reduce their monthly payments or simplify their financial obligations by consolidating multiple loans into one, avoiding the need to manage several separate loans simultaneously.

Loan Modification Or Forbearance 

Lastly, you can request a loan modification or forbearance from your creditors. A loan modification means you and your lender are agreeing to alter your loan terms, structure or interest rate.

On the other hand, forbearance means you get a reprieve from debt payments for a specific amount of time. For example, you might receive a three-month forbearance, meaning you can miss three months of payments without penalty. Once the forbearance expires, you must start making payments again. This approach can give you a needed break and an opportunity to get your finances in order before resuming your regular payment schedule.

Bankruptcy FAQs

Bankruptcy is a complex decision with far-reaching consequences. Therefore, it’s best to understand the details before filing. The following FAQs can help you decide whether to file.

Who can file for bankruptcy?

Individuals, businesses, and organizations with debt problems can file for bankruptcy. Typically, individuals file for Chapter 7 or 13 bankruptcy, while corporate bodies file for Chapter 11 bankruptcy.

Can I file for bankruptcy without a lawyer?

You can file for bankruptcy without a lawyer. Filing on your own behalf, known as filing pro se, means taking responsibility for filling out your petition, knowing the right chapter to file for, retaining ownership of exempt assets, and following bankruptcy legal procedures correctly. For most people, hiring an attorney is the best way to ensure your filing goes smoothly and according to the law.

What happens after I file for bankruptcy?

After you file for bankruptcy, you’ll send the required tax and financial documents to your trustee. Then, you’ll attend a 341 meeting where your trustee confirms your bankruptcy case and allows your creditors to ask about the situation. Then, you’ll fulfill the obligations of your bankruptcy (such as making timely payments or selling specific assets), take a debtor education course, and wait for the court to discharge your debts.

How many times can I declare bankruptcy?

You can declare bankruptcy as often as your situation gives rise to such a decision. However, a bankruptcy can stay on your credit report for 7 – 10 years, affecting your ability to get a loan and lease an apartment. As a result, it’s best to avoid declaring bankruptcy multiple times if there are other feasible options for addressing your debt.

Can I take out a mortgage after I file for bankruptcy?

Filing for bankruptcy hurts your credit history and stays on your report for 7 – 10 years. As a result, it can hinder your ability to take out a mortgage and qualify for other forms of credit.

The Bottom Line On Declaring Bankruptcy 

Bankruptcy is a legal process designed to provide individuals, businesses, and organizations overwhelmed by debt with an opportunity for financial relief. It is not a solution that erases all debts, as certain obligations such as government debts, student loans, mortgages, and child support cannot be discharged. While bankruptcy can offer advantages such as establishing a plan to address debt and erasing unsecured debt, it also has downsides, including the potential loss of assets and long-lasting effects on credit. Before considering bankruptcy, explore alternative options such as credit counseling, debt consolidation, and loan modification or forbearance. Making an informed decision about bankruptcy requires careful evaluation of personal circumstances and consultation with professionals to navigate the process effectively.

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