Before deciding whether to file for bankruptcy, you must be able to define bankruptcy. It is important to ensure that this is your best option.
Bankruptcy filing is often done as a last resort due to the impact it has on credit scores and assets. In some cases, it’s the best way to move on from debt.
If you’re thinking about taking a step in this direction, read on to learn the answers to frequently asked questions on bankruptcy.
Define Bankruptcy: What It Is and How It’s Done
1. Define Bankruptcy: What Exactly Does It Mean?
Bankruptcy is a legal procedure commonly filed by an individual or a business struggling to repay their debts. Through this, debtors can come up with a strategy to pay off their debts.
Bankruptcy allows debt to be repaid through asset liquidation, a reorganization plan, and discharge.
Note that bankruptcy doesn’t guarantee freedom from all debts. Some of the debts that bankruptcy filing does not cover are student loans, secured debts, income tax liabilities, and child support.
2. What Is an “Automatic Stay?”
Once you file for bankruptcy, the court issues an automatic stay. This is an order that protects debtors from creditors’ payment collection.
The court assigns a bankruptcy trustee to help you sort out your assets so that you can repay your debts. This option is more ideal than having your remaining assets seized by creditors for their benefit.
If a creditor violates the automatic stay when they know it is in effect, penalties can be sought. Some of the assets protected by the automatic stay are:
- Shelter (it prevents foreclosures and evictions)
- Utilities (it can stop your utilities’ disconnection)
- Wages (it prohibits wage garnishment)
In addition to the debts not covered by bankruptcy, the automatic stay does not protect some items:
- The repayment of pension loans
- Criminal proceedings
Multiple bankruptcy filings may cause the automatic stay to be effective for only 30 days. In addition, creditors can ask the court to lift the automatic stay by citing proof that its purpose is not being served.
3. When Is It Too Late to File for Bankruptcy?
Instances when it’s too late to file for bankruptcy are rare.
You can file for bankruptcy even if you have a lawsuit against you (if the lawsuit is for a debt that can be discharged through bankruptcy).
4. Define Bankruptcy Chapters: What Are the Different Types of Bankruptcy You Can File?
Bankruptcy has two general categories: liquidations and reorganizations. Liquidation means your assets may be sold to repay your debt. Reorganization means you must create a repayment plan to settle your debts.
The different types of bankruptcies filed are Chapter 7, Chapter 13, Chapter 11, and Chapter 12. Among these, Chapter 7 (liquidation) and Chapter 13 (reorganization) are the most common.
Chapter 11 and Chapter 12 are also types of reorganization bankruptcy. Here are the qualifications for each chapter:
- Chapter 7 Bankruptcy — open to individuals and businesses
- Chapter 13 Bankruptcy — open to those with reliable and sufficient income
- Chapter 11 Bankruptcy — open to businesses
- Chapter 12 Bankruptcy — open to family farmers and fishermen
5. Can You Choose the Bankruptcy Type You Will File?
Your options vary depending on your financial and debt situation. You must meet the requirements to qualify for each chapter. In some instances, debtors are eligible for a specific chapter only.
Often, individuals and businesses who can choose opt for Chapter 7. The process here can be shorter than the process for Chapter 13. Aside from liquidation, they also have a shot at having their debts discharged.
6. Define the Bankruptcy Procedure: How is Bankruptcy Filing Done?
To kickstart your bankruptcy filing process, you must first complete credit counseling with an approved provider. The credit counseling certificate of completion is part of the bankruptcy paperwork. This should take place 180 days before you file your bankruptcy petition.
Then you must complete and file your bankruptcy documents with the court.
Get a copy of your credit report as well, because this will help you understand your case. You will pay a filing fee, whose amount will depend on the bankruptcy type for which you petition.
You can file for bankruptcy on your own, but some parts of the process can be challenging to handle by yourself. These include the means test for Chapter 7 and the repayment plan for Chapter 13. That is why it is advisable to work with a bankruptcy lawyer if you don’t want to go through the process by yourself.
7. How Much Does Bankruptcy Filing Cost?
For Chapter 7, the filing fee is $335, while for Chapter 13, it’s $310. The filing fees are the same across all bankruptcy courts.
If you don’t have the financial resources to cover these fees, you can file a fee waiver application. Those whose income is below 150% of the national poverty guidelines are eligible. Another option is to pay the filing fee in installments.
8. How Long Does Bankruptcy Stay on Your Credit Report?
A Chapter 7 bankruptcy will stay on your credit report for 10 years, while a Chapter 13 bankruptcy will stick around for seven years.
Don’t worry — once the bankruptcy closes, you can start rebuilding your credit. Be disciplined in handling your finances so you avoid falling into the same trap.
9. Are Bankruptcy Cases Subject to Reopening?
Yes. This can happen for various reasons and the motion to reopen the case can come from anyone — the debtor, the creditor, or even the bankruptcy trustee.
In some instances, you must reopen your case to submit extra paperwork or file a motion. One of your creditors or the bankruptcy trustee can also reopen your case if they discover new assets to divide among creditors.
Reopening a bankruptcy case requires a court order. This action incurs a fee: $260 for Chapter 7 bankruptcy and $235 for Chapter 13 bankruptcy.
10. What Are Your Other Debt Management Options?
As mentioned earlier, bankruptcy filing is often a last resort. Before pushing through with your petition, you may want to consider other debt management options.
One of them is debt consolidation. This allows you to merge your various debts into a single one so that you can more easily repay them. For guidance through the process, enlist the help of professionals, like banks.
Other options are the SBA ARC Loan Program (for businesses) and the US Cooperative Extension Service.
You may be experiencing financial difficulties. When should you file for bankruptcy? This video from The Dave Ramsey Show answers that question:
Now that you know the basics on bankruptcy filing, you will be able to do more than define bankruptcy.
If you find yourself in debt, you will want to consider all your options. Choose the best debt management option for your financial situation.
If you have exhausted your efforts and bankruptcy is your only option, work with a bankruptcy attorney. They can help you evaluate your case and guide you through the steps of filing for bankruptcy.
What’s your biggest concern about bankruptcy filing? Let us know your thoughts in the comments below. We’d love to help you!