When and How to File Bankruptcy
Bankruptcy law is designed to give individuals a fresh startBy Canaan Suitt, J.D. | Last updated on August 4, 2022
Use these links to jump to different sections:
- Knowing When to File Bankruptcy
- Things to Consider Before Filing Bankruptcy
- The Bankruptcy Process
- Speak with a Bankruptcy Attorney
Bankruptcy may sound like a last resort to avoid at all costs.
However, according to Ohio bankruptcy attorney W. Mark Jump, “clients oftentimes wait too long to see [a bankruptcy lawyer] and try various other ways to resolve their debt… I find that when people try to use alternatives, it really just delays the inevitable, and they probably should have filed a bankruptcy before.”
“[Bankruptcy] is a way for individuals, small businesses, and other businesses to legally resolve their debts and eliminate some of their debts through one of the chapters of the Bankruptcy Code,” says Jump.
Of the various chapters of the Bankruptcy Code, “the most common chapter for consumers is chapter 7 bankruptcy, which is referred to as liquidation bankruptcy, and chapter 13 bankruptcy, which essentially allows individuals and small businesses to reorganize their debts and pay many times less than what they owe on their debts over a three-to-five-year repayment plan,” he says.
The rationale for bankruptcy is that “[Congress] wanted to provide individuals with a way to resolve their debts legally, with the protections of the court, as opposed to feeling as though you’re in a hopeless situation trying to resolve your debts on your own,” says Jump.
The bankruptcy process can feel intimidating or overwhelming. Still, with the professional help of a bankruptcy attorney, the process can be relatively streamlined.
Knowing When to File Bankruptcy
Perhaps you’re worried about your financial situation or ability to pay bills. But you don’t know if your situation is bad enough to file for bankruptcy, and you might wonder if there are other debt relief methods you could pursue.
How do you figure out when to pursue the bankruptcy option?
Bankruptcy could be a good option: “If you think you’re having trouble paying your bills (say you’re running 30, 60 days behind) or if you’re concerned that your vehicle might be repossessed, or if you’re facing numerous lawsuits–or even if none of that is happening, but you have a sense that things may be getting out of financial control, don’t hesitate to contact a bankruptcy attorney,” says Jump.
Depending on your situation, financial stresses can come from a variety of sources, including:
- Car loans
- Credit card debt
- Secured loan debt
- Medical debt
- Tax debts
- Old bills (for example, utilities, phone, rent)
Some debts, such as mortgages, are known as secured debt. This means the debt is connected to a particular asset that a creditor can seize if a debtor defaults on payments. In other words, the asset is collateral for the debt.
Unsecured debt, such as credit card debt, is not backed by a particular piece of property. Since creditors don’t have collateral to seize, unsecured loans often have higher interest rates than secured debt.
Whatever the type of debt, it’s essential to realize you don’t have to decide about filing bankruptcy before meeting a lawyer. Instead, meeting with a lawyer can help you make a good decision about filing for bankruptcy. And it’s often better to start this process sooner rather than later.
“I think you can understand [the bankruptcy] option better by initiating the communication [with a lawyer] earlier so you can understand how it compares with other options,” says Jump.
Alternatives to Bankruptcy?
There are also different avenues for alternative debt relief.
“People can resolve their debts through what’s called debt settlement. They can do it on their own, or they can do it through an attorney or a debt settlement company,” says Jump.
This may sound like an attractive option. However, there are downsides: “typically [individuals] would have to do [debt settlement] one creditor at a time, and a lot of times that requires them to have lump sum payments to pay their creditors to get attractive resolutions. That’s very difficult for people to accomplish when they don’t have that type of liquidity,” he says.
Debtors will often end up in a “situation where [creditors] have begun legal action against you (a lawsuit).” At this point, “you really need to immediately contact a bankruptcy lawyer because, more than likely, that lawsuit is going to result in a judgment, which will translate into wage garnishment, and that can be very expensive and taxing on your paycheck every month, and potentially make it very difficult for you to resolve the rest of your debts,” says Jump.
In contrast to these piecemeal debt settlement options, bankruptcy provides immediate relief. As soon as an individual files bankruptcy, bankruptcy courts issue an order called an automatic stay that stops creditors from pursuing:
- Debt collection calls
- Wage garnishment
Things to Consider Before Filing Bankruptcy
If you’re considering bankruptcy, there are a few things to be aware of going in.
Debts Bankruptcy Won’t Eliminate
Known as non-dischargeable debts, there are a few kinds of debts bankruptcy won’t erase, including:
- Student loans
- Child support
- Court fees
“As a matter of law, both private student loans and federal student loans are generally non-dischargeable in a bankruptcy proceeding unless there’s an extreme set of circumstances where you can demonstrate what’s called an undue hardship, which is very difficult. So, generally, student loans will survive any type of bankruptcy proceeding,” says Jump.
The same is true, Jump adds, of alimony and child support.
Credit Score Impact
Declaring bankruptcy will likely hurt your credit report. And it could take a few years to rebuild your credit.
However, individuals with a lot of debt typically have bad credit scores already. So, although credit score impact may not be a deciding factor, it’s good to be aware of this impact.
Depending on the type of bankruptcy you file (chapter 7), co-signers to your debts may still be liable to creditors if you can’t repay them. You should speak to an attorney about this.
Non-exempt property is any asset not protected in bankruptcy, meaning creditors can seize it to satisfy debts.
You may be worried about all the property you could lose if you file for bankruptcy. However, even though chapter 7 is referred to legally as a liquidation proceeding, “It’s highly unusual that anyone would have to liquidate any of their property,” says Jump.
The reason for this, “is that there are federal exemptions and state exemptions. [Which exemption scheme is used] really depends on your state… Homes, motor vehicles, and other personal possessions are generally protected,” he says.
It’s important to speak with a bankruptcy lawyer who understands your state’s exemption scheme so you can protect as much of your property as possible.
The Bankruptcy Process
When it comes to filing for bankruptcy, “Unfortunately, it involves a lot of forms–which sort of goes to the point that you really need an attorney to help you make sure you have the documentation put together,” says Jump.
To get the process going, you will need to:
- Submit a bankruptcy petition. You will provide your individual information on this form.
- Pay the filing fee. This can be done electronically or at your local bankruptcy court.
- Compile schedules. Jump explains that bankruptcy filers will have to submit several schedules or lists to the bankruptcy court:
- Schedule of assets listing the things you own
- Schedule of all your debts
- Schedule of income and expenses to demonstrate which “type of bankruptcy you qualify for–and, if you’re in repayment under chapter 13, to show how much you’re able to pay back on a monthly basis to your creditors,” says Jump.
There are also some requirements to complete before filing:
- Credit counseling course. Filers need to take a counseling course to get a certificate in debtor education. This certificate is a prerequisite to filing chapter 7 and chapter 13.
- Means test. “To file chapter 7 bankruptcy, you need to qualify based on income. [The qualification is] measured by the last six months of your income, which needs to be below what’s called the Current Median Income for your particular community based on your family size,” says Jump.
- Meeting of creditors. “Once [the bankruptcy petition is] filed, there’s a meeting with creditors about 30 days later. It is unusual given today’s technology that creditors actually appear at that hearing,” says Jump. By the time of the creditor meeting, “your attorney will have provided your bankruptcy trustee (the individual appointed to preside over your case) with all the documentation they need,” he says.
“People who think they need to file bankruptcy shouldn’t be concerned or worried about… hearings” such as the creditor meeting. Hearings “should go relatively smoothly,” he says. “Bankruptcy courts are their own group of courts in the federal court system, and all of the filings are done electronically with your attorney… so it’s pretty easy to access.”
As for the timeframe of filing bankruptcy, “it can be streamlined if clients can provide their attorneys with all the information that they need–for example, pay stubs, tax returns, copies of their vehicle titles, or mortgage deeds. If all the documentation is available, then it would be expected that an attorney would be able to get the case filed in relatively short order,” says Jump.
However, things often don’t go as smoothly as hoped.
“It’s often challenging and often overwhelming for clients to get their hands on all that documentation as quickly as they would like. For that reason, it can take two weeks to a month to get a filing ready,” says Jump.
Speak with a Bankruptcy Attorney
If you are considering bankruptcy, it’s important to seek legal advice from a bankruptcy attorney as soon as possible.
“If people are experiencing financial difficulty, they shouldn’t feel as though contacting a bankruptcy lawyer is their last stop. It should probably be one of their first stops as they’re trying to explore professional opinions and help for their finances,” says Jump.
Fortunately, many attorneys provide free consultations, allowing the attorney to hear the facts of your case and for you to determine if the attorney meets your needs.
To see whether an attorney or law firm is a good fit, ask informed questions such as:
- What are your attorneys’ fees?
- What billing options do you offer?
- What is your experience in bankruptcy cases?
- What type of bankruptcy do I qualify for?
- What exemptions do I have under my state’s law?
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