No one decides to file for bankruptcy lightly. It’s clear that bankruptcy can be a financial lifesaver if you need to wipe out debt or catch up on a late mortgage or car payment. But, it has detriments, too. For instance, a bankruptcy filing will stay on your credit report for up to ten years.
So how do you figure out whether bankruptcy will be right for you? You can start by reviewing the list of important things to know about bankruptcy below.
1. Ways to Avoid Bankruptcy
You’ll likely want to explore all options available to you before committing to filing for bankruptcy.
Negotiating down your debt. You might be able to negotiate an agreement with your creditors to pay less than what you owe. Keep in mind that you’ll pay income tax on any forgiven amount.
Using a credit counseling service. If you want to pay off debt, but can’t afford the payments, a credit counseling service can help you reduce the interest rate. You’ll pay less each month and still pay off the account sooner than if you paid minimum monthly payments. Be sure to avoid credit counseling scams.
Seeking out mortgage help. If you’re behind on your mortgage, it’s a good idea to check with your lender about a workout program. You’ll want to learn more about your options for stopping foreclosure.
2. Types of Bankruptcy
Each bankruptcy chapter solves different problems, so you’ll want to select the bankruptcy type that will best meet your needs.
Chapter 7 bankruptcy. In Chapter 7, individuals can wipe out most credit card debt, as well as medical bills, personal loans, and utility bill balances while keeping the property needed to maintain employment and a place to live. A business might file this chapter to wind down a closing business.
Chapter 11 bankruptcy. A Chapter 11 allows businesses (and individuals with large debt balances) to work with creditors to pay what they can afford. It’s the chapter most businesses select when they want to remain open.
Chapter 13 bankruptcy. In Chapter 13, individuals repay creditors some (or all) of what they owe through a three- to five-year repayment plan. An important mechanism of this chapter allows filers to catch up on overdue mortgage and car payments.
3. Costs of Filing Bankruptcy
Most people have to pay something to file for bankruptcy, although fees are often reduced or waived for low-income filers.
Attorneys’ fees. You’ll want to research the average cost to retain an attorney in Chapter 7 and Chapter 13. Some people represent themselves in Chapter 7, but it’s not advised in Chapter 13 due to the complexity involved in drafting a repayment plan.
Filing fees. You’ll need to pay a filing fee with the bankruptcy court. You can find the current amount on the U.S. Court’s bankruptcy webpage.
Bankruptcy courses. You’ll need to take a credit counseling course before you file for bankruptcy, and a debtor education course afterward. Both courses should cost a total of $60 or less.
4. Financial Records
Bankruptcy requires disclosing everything about your financial situation. You’ll want to know what you’ll need. Plus, you’ll rely on the records you gather to help decide the viability of bankruptcy.
Taxes. You’ll need up to four years of your federal income tax statements.
Financial statements. Gather together all bank, retirement, and investment account statements.
Proof of income. Locate paycheck stubs, earning statements, unemployment insurance stubs, or, if you’re self-employed, your profit and loss statements.
Bills. Round up your most recent creditor bills, including those that show the balance on your mortgage and car loan. Be sure to include correspondence and collection notices from collection agencies. You might want to obtain a copy of your credit report.
5. Protecting, Losing, or Paying for Assets
It’s important to know whether you’ll be able to keep all of your property before you file. Will you lose some of your assets in Chapter 7? Will you have to pay extra to keep everything you own in Chapter 13?
Property list. Prepare a list of all real estate, vehicles, machinery, furniture, household items, and other property. Include the value of each item (you can group together small household goods, such as dishes and linens).
Property equity. Determine the value of each asset as well as the equity you have in each item.
Exempt property. Find out whether you can protect your property using your state’s bankruptcy exemptions.
6. Saving Property and Erasing Debt
Bankruptcy will erase a lot of debt. But everything doesn’t go away (get discharged).
Debt list. Prepare a list of all of your debt, including the creditor and amount you owe.
Net benefit of bankruptcy. Evaluate whether the amount of debt you’ll discharge will be enough to offset any property you’ll lose or have to pay to keep.
Learn about saving property in Can I Keep My House and Car in Bankruptcy? What Readers Had To Say.
7. The Bankruptcy Process
It’s a good idea to understand the steps involved in bankruptcy. Here are the basics (a case can require additional steps):
Complete and file forms. Disclose every aspect of your finances on official bankruptcy forms filed with the court.
Provide financial documents. You’ll turn over tax returns, proof of income, and financial statements to the bankruptcy trustee assigned to your case.
Take two financial courses. You’ll complete one before you file and one afterward.
Attend a creditors meeting. All filers must appear at a 341 meeting of creditors to answer questions about your filing under oath.
Confirmation hearing (Chapter 13 only). If you file a Chapter 13 case, you might have to appear at a repayment plan confirmation (approval) hearing.
8. Bankruptcy Fraud
Filers should steer away from bankruptcy if there’s a possibility the filer could be accused of fraud. The punishment for bankruptcy fraud includes fines, imprisonment, and denial of debt elimination. Here are a few things to consider.
Have you given away property or assets in an attempt to defraud (not pay) a creditor?
Did you obtain credit based on an inaccurate statement of your income or other untruthful information?
Did you buy something on credit with no intention of paying for it?
Do you suspect a creditor—including ex-spouses and previous business partners—feels that they’ve been wronged financially?
9. Filing Consequences
There’s no way around it—the benefits of bankruptcy can come at a cost.
Bankruptcy can be embarrassing and hurt your professional reputation.
A bankruptcy can remain on your credit report for ten years
It might be challenging to lease an apartment or get a loan for a home or car for some time.
10. Bankruptcy Lawyers
You’ll want to find an attorney you trust—especially if you have questions about the consequences of filing for bankruptcy. Here are a few tips for selecting a good bankruptcy lawyer.
Get a list of bankruptcy attorneys in your area.
Check references with family, friends, co-workers and bar associations.
Compare attorneys' qualifications, experience, and estimated fees.
