Debt can quickly spiral out of control, and it can be tough to reconcile your financial commitments. If you find you're unable to pay your outstanding bills, you might consider filing for bankruptcy.
What is bankruptcy?
Bankruptcy is a legal process that could allow for some debts to be forgiven and others to be repaid through asset liquidation and payment plans.
How bankruptcy works
When you decide that filing for bankruptcy is the right financial choice for you, you'll first need to learn more about the different types of bankruptcy filings and decide which best applies to your situation.
Once you’ve selected how you'll file, you will need to prepare your bankruptcy paperwork. At this step, you will need to decide if you intend to work with a bankruptcy attorney or if you want to file on your own behalf. If you want legal help but cannot afford to pay a bankruptcy attorney, you may be eligible for free or low-cost services via a public legal aid association in your area.
During the filing and legal process, you may be required to participate in credit counseling as part of your debt forgiveness and repayment plan. Credit counseling is often delivered in a classroom format and can teach you how the bankruptcy process works, what debt relief is and how to responsibly manage your money and credit.
Once you have completed your credit counseling, the court proceedings for your bankruptcy filing will begin. You'll work with the court and your legal counsel to establish a plan for repayment timelines and asset liquidation. Once this plan is finalized and approved by the courts, your bankruptcy proceedings are considered completed, and the repayment stage begins.
Types of bankruptcy filings
There are several types of bankruptcy filing options categorized within the U.S. Bankruptcy Code. The type of bankruptcy filing you can pursue depends on several factors, including your net worth, the kind of debt you hold, how you plan to reconcile your debt and whether you're filing for bankruptcy as an individual, a business or a municipality.
Chapter 7 bankruptcy is a common option if you need forgiveness for individual debts, like credit card balances or medical bills. Under Chapter 7 bankruptcy, the assets you have, including real estate and high-value material goods, may be sold — or liquidated — to repay your debts to your creditors. If the value of these assets does not equal or exceed the debt you owe, your remaining debt might be forgiven.
Chapter 9 bankruptcy is a bankruptcy option reserved for public entities like cities, towns, municipalities and school districts. If a city applies for Chapter 9 bankruptcy, it does not have to liquidate its assets; instead, the entity will work with the courts and its creditors to come up with a feasible and reasonable payment plan.
Chapter 11 bankruptcy is often used by businesses or organizations who need financial forgiveness while they reorganize their work. A business might file Chapter 11 bankruptcy to prevent closure or dissolution while retooling its internal financial or operations strategy. When a business files for Chapter 11 bankruptcy, it creates a debt repayment or forgiveness plan with its creditors to continue business without service interruption.
Like Chapter 9, Chapter 12 bankruptcy applies to a certain set of organizations. Chapter 12 bankruptcy is available only to family farms and fisheries, and does not require debtors to sell or liquidate assets. Instead, those filing for Chapter 12 bankruptcy can work out a debt forgiveness and repayment plan with the courts and their creditors.
Chapter 13 bankruptcy is another option for individuals needing debt relief, although businesses are eligible for this type of filing as well. Chapter 13 bankruptcy is used by high-earning individuals or businesses with consistent income. Instead of liquidating assets, people and entities filing Chapter 13 work with the courts and their creditors to create a reasonable and feasible debt repayment plan. Chapter 13 assumes that payment will come from future earned wages, not from selling assets already owned by the debtor.
Chapter 15 bankruptcy was approved in 2005 specifically for multi-country bankruptcy cases involving businesses or individuals with international debt. A person or business who files Chapter 15 debt might have assets in more than one country, for example, or carry debt from creditors in multiple federal jurisdictions. If you choose to file Chapter 15 bankruptcy, the case will be filed and managed from your country of origin.
How to file for bankruptcy
Filing for bankruptcy is a legal process with multiple steps. When you decide to file for bankruptcy, you first decide which chapter you are eligible for and then organize your outstanding debts to get a clear picture of how much you owe and who your debtors are. From there, you can work with a bankruptcy lawyer to file the appropriate paperwork with your local court system. The court will outline your next steps depending on the complexity of your case and the kind of filing you pursue.
Your bankruptcy filing will conclude with a ruling from the courts dictating how much debt will be waived, what repayment plan will be executed and which assets will be liquidated, if appropriate.
Can you file for bankruptcy without a lawyer?
Yes. It is possible to file for bankruptcy without a lawyer if you're not sure how to find a bankruptcy attorney or if you prefer to represent yourself in bankruptcy court. However, it's important to do your research to make sure you're taking all of the appropriate steps to successfully complete the bankruptcy process. If you're unsure of which steps to take or need assistance in understanding bankruptcy law and the options available to you, you might want to consider hiring legal counsel. Some bankruptcy attorneys will work their fees into your bankruptcy repayment plan.
The pros and cons of filing for bankruptcy
Like any significant financial activity, the decision to file for bankruptcy can feel complex and overwhelming. You will need to consider a number of different benefits and drawbacks to the process of bankruptcy before deciding whether or not to file.
Pros of bankruptcy include:
- Resetting your finances for a clean slate
- Protecting your assets
- Having eligible debts forgiven or reduced
- Repairing bad credit by paying off your outstanding debts
No solution is perfect, and there are also a few factors to contemplate before you file for bankruptcy.
The cons of bankruptcy include:
- Having a bankruptcy filing on your credit report
- Not discharging debts that aren't eligible to be forgiven
- Impacting other parts of your life; for example, some landlords will not rent to people with a bankruptcy filing on their credit report
Ultimately, there is no perfect solution to debt management, and bankruptcy isn't always the best choice. Every situation is different. It's important to understand the pros and cons of filing for bankruptcy, and its impact on your financial health.
How much does it cost to file bankruptcy?
There is no set cost for filing for bankruptcy. You should expect to pay legal fees and filing fees, and you may also have to pay fees associated with pulling credit reports. Several factors contribute to the out-of-pocket bankruptcy costs you'll be responsible for, including the kind of bankruptcy you choose to file, the amount of your debt, the assets you hold and whether you choose to retain legal counsel. Filing fees vary depending on your location and the complexity of your case.
In some cases, even the costs associated with a bankruptcy filing can be a part of the settlement itself. You could arrange to pay bankruptcy filing and administrative fees in installments or request that the bankruptcy court waive these fees if appropriate.
How long does bankruptcy stay on your credit report?
Filing for bankruptcy will appear on your credit report, but it's not a permanent note in your file. The amount of time that a bankruptcy filing will appear on your credit report depends on the kind of bankruptcy you choose and how your debts are repaid.
For example, a Chapter 7 bankruptcy filing can appear on your credit report for up to 10 years. A Chapter 13 bankruptcy, on the other hand, can be removed from your credit report after seven years if you fulfill the terms of the repayment plan. The best credit repair companies will work with you to expedite your bankruptcy term and potentially shorten the amount of time you'll carry a bankruptcy notation on your credit record.
How often can you file for bankruptcy?
You can file for bankruptcy as many times as you need to, but there are rules around the amount of time between filings. The law dictates that you must wait eight years between Chapter 7 filings, for example, and two years between Chapter 13 filings.
Is filing bankruptcy worth it?
Deciding if filing for bankruptcy is worth it depends on your specific situation, your financial outlook and your long-term goals. As you decide if bankruptcy is worth it, you might ask yourself a few questions:
- How will filing for bankruptcy help or hurt me in the long run? Will a bankruptcy filing protect you from further legal action by your creditors or help you secure the long-term health of your individual and business finances? Filing for bankruptcy — especially early in your earning lifetime — might be a strategic move. By removing debt early in your life, you might have opportunities to rebuild your wealth later on.
- What are the pros and cons of other debt-management tools available to me? You might be better off employing other ways to conquer your debt, like a debt consolidation strategy, credit counseling or taking out a debt payment loan. You might also consider other tools to improve your financial situation, such as adjusting your discretionary spending, reducing the amount of money you spend on monthly expenses and finding ways to generate additional income.
- Do I want to have a bankruptcy filing on my credit report for the next several years? Are you considering purchasing a home or trying to secure a business loan? Maybe you'd like to further your education and take out a student loan or co-sign on a loan with a spouse or a dependent. If so, you'll want to think about the impact of a bankruptcy on your credit report on your future purchases and financial plans. Some creditors might not award loans to those with a history of bankruptcy.
Alternatives to filing bankruptcy
Bankruptcy is a safe and reasonable choice for many people and corporations that need debt management assistance and debt forgiveness. However, if you can't or don't want to file for bankruptcy, you can explore a few other options to get you back on a smooth financial track.
One option is to explore balance transfer credit companies. The best balance transfer credit cards let you put all your debt on a single credit card. This will stop you from paying multiple interest fees and penalties to different companies and collection agencies.
Some creditors offer independent debt management and forgiveness. For example, credit card companies or medical billing firms might be willing to work out a payment plan with you. In some cases, you can contest the bills issued to you and have some waived or forgiven entirely. You can also look at debt consolidation options; the best debt consolidation loans will bring all of your debt into one central account and could even help you arrange some debt forgiveness.
You can also look at ways to increase your incoming revenue stream to help pay off your balances and figure out how to get out of debt for good. You could take on additional employment and dedicate the extra funds toward your debt forgiveness.
Finally, you can adjust your budget and spending habits to allow you to aggressively pay off your outstanding debt and repair bad credit. By making changes to how you spend your money day to day, you may find that you have extra funds that you can dedicate to your debt repayment.
Summary of Money's explanation of bankruptcy
Bankruptcy is a legal process designed to help debtors and creditors settle debt, either through debt forgiveness, asset liquidation or a payment plan. Filing for bankruptcy has pros and cons, but everyone's financial situation is different. There are several kinds of bankruptcy depending on your net worth, your future earnings potential and whether you intend to file as an individual or a business. Ultimately, the choice to file for bankruptcy is yours, and there are several debt management alternatives.