When should I file for bankruptcy?
In most cases it is best to file bankruptcy as soon as you realize that it is the best option for you. However, some people may opt to wait for a number of reasons.
For example, much of the information in your bankruptcy petition revolves around your income. Your average income is calculated based on the past six months. If you recently had an income reduction, it may make sense to wait so your petition shows a lower income over that period.
Also, some jurisdictions offer better exemptions than others. If you have recently moved from one state to another, or are planning a move, you may want to file at the time which would allow you to use the better exemptions.
If you are in the middle of a divorce, it may make sense to wait until your divorce is finalized before you file, especially if your spouse is not willing to file.
What effect will filing have on my credit score?
It is true that your credit score usually goes down shortly after filing bankruptcy, but later on it often actually goes up.
FICO, a credit scoring system used by our three national credit bureaus (Experian, Transunion and Equifax), calculates your score by grouping you with people in similar situations. There are ten categories, including a separate category for people who have declared bankruptcy. Instead of being compared to those with sterling credit history, you will be compared against others who also have declared bankruptcy - so your own situation will look relatively better.
Being late on your bills or having balances owing on unpaid debts weighs your credit score down. Once you have those debts discharged through bankruptcy, they no longer appear on your credit report and hold your credit score down. Having those debts removed allows you to start working to rebuild and raise your credit score.
Will I be able to keep my credit cards, or get them back?
You will probably need to surrender your existing credit cards.
You may be able to avoid this if your credit card has been paid off in full before filing bankruptcy. However, remember that any payments made within 90 days before filing may be seen as “preferential transfers” and the trustee may seek to recover them, to distribute those funds more fairly between all creditors.
Some credit card companies will give you your credit cards back, often at the same or better rates if you agree to reaffirm a portion of discharged debt. However, in most cases this is not advisable. Credit cards charge some of the highest interest rates, and the point of bankruptcy is to recover from debt and get a fresh start - not to keep your debts and continue to pay high interest. These types of reaffirmation agreements should not be entered into without consulting your attorney first.
What does it cost to file bankruptcy?
The answer to this varies based on a lot of factors.
Chapter 7 will typically require a court fee of $306, plus $50 to $100 for obligatory credit counseling and financial management courses. On top of that will be your attorneys’ fees, which may range from $1000 to $2500. The total cost therefore will likely be between $1500 and $3000.
Chapter 13 involves a court fee of $279, which can be paid as part of your plan, as well as $50 to $100 for credit counseling and financial management courses. Attorneys’ fees for Chapter 13 are higher, because if the additional work required, and usually come to around $3000 to $4000. A typical total cost is around $4000. Many attorneys will agree to you paying only a small amount of their fees up front, and working the rest into your repayment plan.
How long does a bankruptcy take?
It typically takes a few weeks to prepare a petition and all of the necessary documents.
From the time the petition is filed, a Chapter 7 bankruptcy is usually completed and the debts are discharged within four to six months. A Chapter 13 bankruptcy involves a repayment plan, sometimes over three years, but more often over five years. Usually the discharge is granted after four years.
Who will know I filed bankruptcy?
This is a common question many people want to know before they file bankruptcy. People are concerned about ending up on a bankruptcy list, or their friends and neighbors being able to find out.
Bankruptcy filings are a matter of public record, but these are still not easily discoverable. Additionally, the court goes out of its way to protect some of the private information for consumers.
This means that, despite being a public record, bankruptcy information is not easy to access. The information is not indexed on Google or other consumer search engines, and people must register for a PACER account (Public Access to Court Electronic Records, a service provided by the Federal Judiciary) before accessing these documents online. These steps make it difficult for anyone to find out anything about your bankruptcy unless they already know when and where you filed.
Bankruptcy protects you from having your employer find out if you are in the process of being garnished. Your employer will know if you are garnished, as they will have to divert a portion of your pay to your creditors. If bankruptcy prevents that garnishment, your employer will probably not find out about your financial situation.
Bankruptcy also protects people from discrimination by employers. In fact, people who declare bankruptcy may be better off applying for a job that requires a credit check than those with poor credit who have not declared bankruptcy, because there is no protection in the law from discrimination against those who have not declared bankruptcy.
How do I find an attorney?
Recommendations by friends or colleagues are always very helpful in finding reliable professionals in any field, if you feel comfortable asking around. These days, the internet is probably your best resource, and it is more confidential. The website www.Avvo.com allows you to search for attorneys by field of practice (e.g., bankruptcy) and by location. You can also try your local bar association for suggestions.
Do not commit to an attorney based only upon a recommendation. The next thing to do is to meet with your prospective attorney. (Many attorneys will offer an initial consultation for free). Make sure your meeting is with the actual attorney and not with a paralegal. Heed any red flags, such as an attorney who is too busy to meet with you, or who is slow to respond to your questions or concerns.
Ask directly about fees. It’s important to always know up front what you are paying.
And remember: age and experience do not necessarily mean an attorney is going to be the best person to represent you. Recommendations matter, but so does your gut sense about whether this person has time for you, and communicates clearly and directly with you. This is why it’s important that you meet with an attorney before you make a final decision to hire them.
What if I don’t want to go through an attorney?
As we’ve noted above, you are not legally required to use an attorney. However, most people find that they will be ahead even after paying an attorney, because an experienced person familiar with the complicated bankruptcy process can help with decisions that such as how to deal with assets and exemptions,so you can keep as much as possible.
If you don’t want to work with an attorney, you have the option of working with a petition preparer. They are cheaper, but they are not allowed to give you legal advice. They only help you navigate the paperwork.
You can also file “pro se,” on your own. You can use the information that you find on this website and elsewhere to file on your own. This is definitely not recommended for most filers, because bankruptcy law is very complex. Some pro se filers may end up filing bankruptcy when other options would have worked better for them, or file under the wrong chapter, or miss some of the property they would have been allowed to exempt.
Should I file alone, or with my spouse?
Married couples are permitted to file bankruptcy together, in what is known as a joint bankruptcy petition. Regulations about joint bankruptcy vary from state to state. Whether it is to your advantage to file jointly, or whether it would be wiser for one spouse to file and for the other to remain outside of the bankruptcy, depends upon numerous factors. Here are a few considerations:
- If both spouses need to file bankruptcy, filing jointly is cheaper than filing two separate cases.
- If both spouses have a lot of dischargeable debts, joint bankruptcy will wipe out those debts for both partners.
- How much property you may exempt from the property varies by jurisdiction. Some states allow you double the property exemptions in a joint filing, while others do not.
- If one spouse owns too much non-exemptable property, you may not be able to exempt all of your assets in a joint bankruptcy, so it would be better for the other spouse to file on their own, to protect those assets.
- If one spouse owes too much in priority debt (which cannot be discharged through bankruptcy), a joint bankruptcy would require the other spouse also to be responsible for repaying that debt (usually through a five-year repayment plan in Chapter 13). In this case it would be better for the one spouse to file on their own, to protect the earnings and assets of the other spouse.
Whether it is wiser to file alone or with your spouse depends upon those local regulations, as well as the details of your personal financial situation: how much debt each of you owes and how much debt you jointly owe; how much in assets you each own and how much assets you jointly own; and how exemptions are treated in your particular jurisdiction.
Since bankruptcy law is under federal jurisdiction, and civil unions are not recognized at the federal level, unmarried couples may not file jointly for bankruptcy.
Remember, your options are: for one spouse only to file bankruptcy, for both spouses to file bankruptcy individually, or for the couple to file jointly. If you are married and trying to decide which of these options to choose, you should work with a bankruptcy attorney who can help guide you to the the best decision.
Can same-sex couples file bankruptcy together?
Until 2013, same-sex couples could not file bankruptcy jointly. However, a ruling by the U.S. Supreme Court that year, cleared the way for same-sex couples who legally married one another in a state, country or province that recognizes same-sex marriage to have all the same rights as other married couples, including the right to file bankruptcy together. As for other unmarried couples, same-sex couples who are not legally married may not file joint bankruptcy.
Can I file bankruptcy more than once?
You may file bankruptcy more than once, but there are waiting periods before you will be eligible for a second discharge. These are discussed in our article on Determining Eligibility for Filing Bankruptcy.
How do I decide which type of bankruptcy to file for?
The decision of which bankruptcy chapter you file under is based on your eligibility, on how much of your debt is secured versus unsecured debt and, finally, on what your goals and intended outcome are.
For most individuals, Chapter 7 is the best chapter to file under for permanently discharging debt. To qualify for Chapter 7, your current monthly income (calculated by averaging your income over the last six months) must be below your state’s median income. If your income is only slightly above the state median, you may still qualify for Chapter 7 by passing the Means Test, which calculates monthly disposable income.
If you do not qualify for Chapter 7, you probably have no choice but to file for Chapter 13. To qualify for Chapter 13, your total debt must be within certain limits. In 2015, those limits were a maximum of $1,149,525 in secured debt (e.g. mortgages, etc.), and a maximum of $383,175 in unsecured debt (e.g., credit cards, medical bills). If either of your debt levels exceeds these limits (which is rare for individuals, other than in the case of an individual operating as a business, such as a real estate developer), then you must file under Chapter 11.
Secured vs. unsecured debt
Aside from the limits in secured versus unsecured debt and being able to qualify for bankruptcy, which chapter is better to file under also depends upon how much of your debt is secured or unsecured. (Refer to our article Understanding Debt if you need a refresher on types of debt). If much of your debt is unsecured debt, such as credit card debt and medical bills, and if you own only a small amount of equity in your home and can exempt it, Chapter 7 would be a more favorable option. You will emerge in a few months with those debts wiped clean, and set for a fresh new start.
However, if you have secured debt on assets you want to keep such as real estate or vehicles, or want to stop foreclosure on your home, then Chapter 13 may be a better choice, provided that you can meet the terms of the repayment plan.
Longterm goals and intended outcome
Deciding upon Chapter 7 or Chapter 13 also depends upon where you would like to see yourself in a few years - and even on what your own personal values are. If you are simply in over your head, and you just want a chance to get a new start, then the “liquidation” aspect of Chapter 7 is probably your best choice: the whole thing will be over in four to six months.
However, if your financial problems are more a result of a specific situation, such as a costly medical treatment, but you are still working and know that you will have income in coming years, then Chapter 13 may be a better choice. If you want to keep your house or your car, Chapter 13 will allow you a chance to make up the missed payments over the five-year repayment plan, reinstating the original loan agreement and keeping your lender from foreclosing on you or seizing your car.
For some people, the desire to meet their commitments and repay their debts is a very important value. This may be difficult or impossible to do when all of your creditors are hounding you at once, and you need time to get organized. Chapter 7 does mean defaulting on many of your debts. The protection of the bankruptcy court through Chapter 13 will allow people who do want to meet the obligations they made the time they need: up to five years to catch up on the missed payments and get back on track.
How should I get started?
If you are thinking of filing bankruptcy, the first thing you should do is get educated: find out whether bankruptcy is the right solution for you, or whether there may be other options that would work better in your case. The fact that you are exploring this site is a great start: you should be able to find all of the information you need here to make that decision.
You would also be very wise to consult with an attorney very early on. Many attorneys will give you a free consultation as you go through this decision-making period. They can help you decide whether bankruptcy is right for you, whether to file Chapter 7 or Chapter 13, and then provide you with expert advice through the whole process.
Read on for our List of Frequently Used Terms in Bankruptcy