How to File For Bankruptcy
Bankruptcy is the last resort to dealing with debt: when a person finds himself in so much debt that paying it off simply isn't an option, bankruptcy can be the only way to handle the situation. It may not be the result of reckless spending — medical bills and other factors can contribute to the need to declare bankruptcy.
The Types of Bankruptcy
There are two different types of personal bankruptcy available to most people: Chapter 7 and Chapter 13. Chapter 7 requires that nonexempt assets are sold to reduce unsecured debt, such as credit card balances and medical bills. Any unsecured debts remaining after the sale are excused. You are allowed to keep your retirement accounts along with any other exempt assets. While exactly what counts as an exempt asset differs from state to state, most people will be able to keep a car and their home as long as they keep making payments on them.
In order to qualify for Chapter 7 bankruptcy, you'll typically need to complete a means test. If the test determines that your income is sufficient to make payments on your debt, you will be unable to file for a Chapter 7 bankruptcy and will need to file Chapter 13. Under a Chapter 13 bankruptcy, you keep your property and agree to a repayment plan for part of your debt that will last either three or five years. As long as you follow the repayment plan, the rest of your unsecured debt will be excused.
No matter which type of bankruptcy you file for, you will receive an automatic stay as soon as your paperwork is filed. An automatic stay stops all collection attempts. In the case of secured debt (such as a mortgage or a lien), the stay is only temporary and you must continue to make payments or risk repossession or foreclosure. You'll also be asked to attend a personal finance course and a creditors meeting, although it is unlikely that creditors will attend.
A Smoother Bankruptcy
Bankruptcy is a hard process, both emotionally and financially. It's important to make the process go as well as possible, both to speed it along and reduce the stress.
- Put all your paperwork together. When you begin the bankruptcy process, you need documentation of both your debts and income for your lawyer to prepare your paperwork. Gather your pay stubs, deeds, titles, letters from collection agencies, tax returns and any other documentation your attorney requests. You'll also need to prepare a complete list of your credit cards.
- Hire a reputable attorney who specializes in bankruptcy cases. The laws governing bankruptcy are complicated and using a cheap service or a lawyer who is not knowledgeable can result in problems that will cost you extra money, as well as risk your home and other assets.
- Reduce your spending as much as possible. If you run up a big bill on your credit cards just before you declare bankruptcy, you may be accused of fraud. The court can require you to pay what you owe on those cards.
- Make plans for building your credit back up as soon as your bankruptcy is complete. It can be very difficult to obtain new lines of credit after a bankruptcy and options like secured credit cards may be necessary. After a year, you'll likely be able to apply for a regular credit card.
- Request your credit history from each of the three credit bureaus after your bankruptcy is complete. You want to make sure that the reports list that all of your unsecured debts have been "discharged in bankruptcy."
Once your bankruptcy is complete, you'll have a clean slate for your finances — mostly. If you have student loans or a secured debt, such as a mortgage or a car loan, you'll still be obligated to make payments on those loans. You may also be asked to sign a reaffirmation agreement for your car loan, guaranteeing that you intend to keep the vehicle and make payments on it. It's important to make payments on those loans on time and in full to help rebuild your credit. Having an additional line of credit, such as an installment loan or a secured credit card can also help.
Keep a close eye on your finances and work hard on rebuilding your credit. If something happens, it is possible to file for bankruptcy again — the limitations are that you can only file once under Chapter 7 every eight years and once under Chapter 13 every two years — but the consequences for your credit are dire. If a lender sees multiple bankruptcies on your credit history, it can become impossible to get credit, even at high interest rates.
When Not to Declare Bankruptcy
If there are debts piling up, bankruptcy may seem like the only way out. However, it's important to consider all the alternatives before choosing bankruptcy. After all, bankruptcies can ruin your credit for years to come. Once you've declared bankruptcy, you'll be looking at higher interest rates on new loans, including credit cards, higher insurance premiums and even a harder time renting a new apartment. Any time someone pulls your credit history, they'll see your bankruptcy on it.
There may be alternatives:
- Negotiating with creditors to reduce your interest or payments may make your debts manageable.
- A credit counseling agency may be able to help you handle your debts and pay them off.
- A combination of cutting expenses and earning extra income, along with a debt repayment plan may make your financial situation manageable.
If you have a chance of paying off your unsecured debts, such as credit cards, in less than five years, declaring bankruptcy could actually do more harm than good. Because a bankruptcy can stay on your credit history for up to ten years (Chapter 7 bankruptcies remain listed for seven to ten years, while Chapter 13 bankruptcies are listed for seven years), any alternative that would let you handle your debts and get the negative information off of your credit report faster is preferable.