Financial hardship can happen to anyone. If you've fallen on troubling times, lost your job, can't pay your bills and you're thinking about bankruptcy, take a look at these eight key bankruptcy facts, so you're ready to face the process head on.
1. There's More Than One Type of Bankruptcy
The intent of bankruptcy is to clear debt and help you get back on stable financial ground. There are several types of bankruptcy, but the two most common types used by consumers are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also sometimes called liquidation bankruptcy. That's because you may have to sell (or liquidate) some of your assets to repay your debts to creditors. The list of exempt property you don't have to turn over to creditors varies, with some states allowing you to choose between federal and state exemptions. In most cases, Chapter 7 bankruptcy cases are "no asset" cases. That means there's a lien (such as a loan) against the property or all of your property is exempt.
At the end of the bankruptcy process, which can take anywhere from four to six months, the court will discharge any remaining debts. Some debts, like child support, alimony, tax liens and court fees cannot be discharged.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a court-mandated repayment plan that requires you to repay some or all of your debts to creditors over a three- or five-year period and allows you to keep your assets. After that time, other debts like medical bills and credit card debt may be completely discharged, meaning they no longer have to be paid.
Similar to filing for Chapter 7 bankruptcy, when you file a petition under Chapter 13, the court stops most collection actions against you and your property. However, your total secured and unsecured debts must be less than $2.75 million as of the date of filing.
2. You Don't Lose Everything in Bankruptcy
It's understandable to be worried you'll lose everything if you file for bankruptcy. However, you won't lose all of your property when you file. Both state and federal bankruptcy laws provide for exceptions that may protect you from giving up many of your assets.
When you file, you list your property on bankruptcy Schedule A/B: Property. The list may include vehicles, your home, furniture, collectibles and clothing among other assets and possessions. A bankruptcy trustee holds your property on behalf of your creditors. But, you are typically allowed to exempt things necessary to maintain your home or job. It's important to speak with a bankruptcy attorney before filing to see which assets are exempt and which are not.
3. Bankruptcy Doesn't Discharge All Debt
Not all states or jurisdictions discharge the same debts, so it's important to check with your local courts for specifics. But some debts—including credit card debt, federal student loans and medical bills—can be discharged in bankruptcy under each chapter of the Bankruptcy Code. The list of debts that may not be discharged is more extensive in Chapter 13 than in Chapter 7, but the following debts typically cannot be discharged in either case:
- Tax liens: In some cases, bankruptcy can clear up tax debt. It must be tax debt that is three or more years old, and you must have filed a valid tax return that includes the debt at least two years prior to filing for bankruptcy. Tax liens, however, cannot be discharged.
- Child support and alimony: Unpaid child support cannot be discharged in either Chapter 13 or Chapter 7. In the same way, alimony cannot be discharged in bankruptcy.
- Court fees: When filing for bankruptcy, you will be obligated to pay certain fees to the court that cannot be discharged. To file a Chapter 7 petition, you'll pay about $320 in court fees, and for filing a Chapter 13 petition, you'll pay around $310, according to USCourts.gov.
- Willful and malicious debts: Debts related to malicious or willful injury to a person or property cannot be discharged under Chapter 7 bankruptcy. Debts for malicious damage to property can, however, be discharged in a Chapter 13 bankruptcy.
- Injury caused while driving impaired: Any debts owed for death or personal injury caused when operating a vehicle while intoxicated or imparied cannot be discharged.
- Homeowners association fees: Specific cooperative housing or condominium fees cannot be discharged.
- Debts owed to certain retirement plans: If you took a loan from your 401(k) prior to being able to take withdrawals, bankruptcy will not get rid of your debt to your retirement plan.
4. Bankruptcy Can Impact Your Credit
Your credit score may take a significant hit in the immediate aftermath of filing for bankruptcy. It will also make getting new credit much more difficult. Filing will also stay on your credit report for years. How long a bankruptcy stays on your credit differs, however.
- Chapter 7 stays on your credit report for 10 years from the date you file.
- Chapter 13 stays on your report for seven years.
Rebuilding your credit after bankruptcy can take time, but it is possible. Consistently making all payments on time, not adding to your debt load, reducing credit card use and keeping your balances low can all help improve your credit so you can stay motivated as your bankruptcy fades into the past.
5. You'll Have to Pay for Your Bankruptcy
Filing for bankruptcy is meant to help you get back on your feet and financially stable. But it doesn't come without certain costs attached. What you pay can vary, depending on the complexity of your case and where you live.
If you can provide evidence that you are unable to pay your fees upfront when you file your bankruptcy paperwork, the court may agree to let you pay installments or waive the fees altogether. You also will be required to pay attorney fees (if you opt to get an attorney) and any other filing or processing fees that may come up in your case.
6. You'll Have to Meet With Creditors
When you file for either Chapter 7 or Chapter 13 bankruptcy, you will likely have to meet with creditors. This is called a 341(a) meeting and is usually held 21 to 50 days after filing your petition. You must attend this meeting.
The bankruptcy trustee assigned to your case usually conducts the meeting. It is informal and typically held in a meeting room, not in a courtroom, and no judge is present. The main reason for the meeting is to verify your identity and the information in your bankruptcy forms. Creditors can also ask you questions during the meeting.
7. Bankruptcy Takes Time
As long as everything is in order, a Chapter 7 bankruptcy can take about four months from filing your petition to final discharge. A Chapter 13 bankruptcy can take about four years from the date of filing. During that time, you will be on a repayment schedule to repay some or all of your debts under Chapter 13.
8. You Might Not Be Eligible for Bankruptcy
Not everyone is eligible for bankruptcy, and the qualifications are different for Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
- In the previous six months from your filing date, your average monthly income must be lower than the average median income for a same-sized household in your state. If not, you must pass a means test, which looks at things like income, expenses, assets and unsecured debts.
- You can't have filed for Chapter 7 bankruptcy in the previous eight years, or Chapter 13 bankruptcy in the previous six years.
- If you attempted to file but your case was thrown out, you must wait 181 days before refiling.
- Within 180 days of filing for bankruptcy, you must finish an individual or group credit counseling course offered by an approved credit counseling agency.
Chapter 13 Bankruptcy
- You must have enough income to make the monthly repayments on your debt.
- Your combined secured and unsecured debts must be less than $2.75 million from the date you filed.
- You must wait 181 days or more before refiling if your case for either Chapter 7 or Chapter 13 bankruptcy was previously thrown out.
- You must have filed both federal and state income tax returns for the past four years.
- Just like for Chapter 7, you must finish an individual or group credit counseling course offered by an approved credit counseling agency within 180 days of filing.
The Bottom Line
Now that you know some key facts about bankruptcy, you're ready to make a more informed decision about your next steps. But before you make a commitment about paying off or paying down your debt—including bankruptcy—understand what impact your choices will have on your financial health going forward.
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