If you are feeling overwhelmed by debt and besieged by creditors or collection agencies, you may want to consider filing for bankruptcy. It can provide relief through the automatic stay, which pauses most collection efforts while the bankruptcy is in progress. Even more importantly, bankruptcy can help you get your financial situation in order by providing for a discharge of most or all of your debts.
Most individuals file for bankruptcy under Chapter 7 or Chapter 13, while businesses can file under Chapter 11 or Chapter 13. Each of these types of bankruptcy has certain advantages and disadvantages. Moreover, you should take the time to consider whether bankruptcy is the best path for you or whether you can use an alternative strategy to resolve your debts.
Often known as a liquidation bankruptcy, Chapter 7 is what most people envision when they think of filing for bankruptcy. A debtor can get rid of debts that qualify for a discharge within a few months of filing under Chapter 7. They would need to pass the means test to prove that they are eligible and do not have enough income to repay their debts. Many people who file under Chapter 7 have very little money or property, and they may be able to cover everything that they own with exemptions. However, any non-exempt property will be given to the bankruptcy trustee so that they can repay creditors to the extent possible.
Read more here about what to expect if you file for Chapter 7 bankruptcy.
If you do not pass the means test, or if you want to retain all of your property, Chapter 13 may be the right option for you. Chapter 13 is often known as a reorganization bankruptcy. A debtor will need to propose a repayment plan that involves making monthly payments on their debts over the course of three to five years. If they keep up with payments on the plan, any remaining debts that qualify for a discharge will be wiped out when the plan ends. People may have trouble qualifying for Chapter 13 if they have substantial non-exempt assets and very little income. If your financial situation changes during the course of a Chapter 13 repayment plan, you may be able to convert your bankruptcy to Chapter 7.
Read more here about Chapter 13 bankruptcy and what it can do for you.
A business can file for bankruptcy under Chapter 11, which is also a type of reorganization bankruptcy. (An individual also technically can file under Chapter 11, but this is unusual because it is more expensive than Chapter 13.) Filing under Chapter 11 allows a business to continue to operate during the course of the bankruptcy, and it does not expose the personal assets of corporate stockholders. Instead of relying on a bankruptcy trustee, the debtor will retain control of the business as a “debtor in possession.” They will be responsible for handling the tasks that a trustee would handle and ensuring compliance with Chapter 11 requirements. A business might get new financing, modify loans, or rearrange its contractual obligations to resolve debts.
Read more here about Chapter 11 bankruptcy if you are considering filing as a business.
A relatively recent form of bankruptcy, Chapter 12 is designed specifically for family farmers and family fishermen. It is largely similar to Chapter 13 in allowing a debtor to craft a repayment plan to pay back their debts, as long as they have a regular annual income. You must meet certain debt limits, which are adjusted periodically, to qualify for this type of bankruptcy. Chapter 12 bankruptcies are very rare and account for much less than 1 percent of the total bankruptcies in the U.S.
Read more here about Chapter 12 bankruptcy if you are interested in exploring this pathway.
Alternatives to Bankruptcy
Not every person who is facing financial pressure should file for bankruptcy. In many cases, a debtor may be able to solve their problems by negotiating with their creditors. By settling for a lesser amount of the debt and following the terms of a repayment plan, they may be able to avoid bankruptcy. A creditor may find this option appealing, since they are more likely to be paid than if the debtor filed for bankruptcy. A credit or debt counseling agency can help a debtor negotiate with creditors and build a debt management program to get them back on track. If you have no assets from which a creditor can collect, meanwhile, you may not find it worthwhile to file for bankruptcy. A creditor cannot send you to jail or take away necessities of life, nor can they harass you in violation of federal laws.
Read more here about possible alternatives to bankruptcy so that you understand all of your available options.
Can I stop a foreclosure by filing for bankruptcy? Depending on how far along you are in the foreclosure process, filing for Chapter 13 bankruptcy may help you to save your home, though this can be more difficult if you have filed Chapter 7 bankruptcy.
Can you file for bankruptcy more than once? You may file for bankruptcy more than once, though you should be aware that waiting periods apply to the different kinds of bankruptcy if you wish to have your debts discharged in the repeat filing.
Will I lose my car if I file for bankruptcy? In Chapter 13 bankruptcy, you will generally not lose your car, and in a Chapter 7 bankruptcy, state exemption laws and the amount of equity you have in the vehicle may prevent you from losing your car.
Automatic Stay As soon as you file for Chapter 7, 11, or 13 bankruptcy, an automatic stay protects you from bill collection efforts by most creditors, though some non-dischargeable debts will not be subject to the stay.
Credit Counseling Before filing for bankruptcy, individuals must complete a credit counseling course to learn about alternatives to bankruptcy, and must take a debtor education and money management course after filing.
Student Loan Debt Unless you can demonstrate in an adversary proceeding that repaying your student loans would cause you undue hardship, student loans are generally considered to be a non-dischargeable debt in bankruptcy.
Creditors’ Rights While creditors can challenge a debtor’s right to discharge, debts are repaid from the bankruptcy estate in order of priority, with things like child support and secured debt being the most important.
Adversary Proceedings Some disputes that arise in the course of a bankruptcy case, such as an allegation by a creditor or trustee that a debtor engaged in fraud, are best handled in a separate proceeding from the main case.