Bankruptcy. It’s not a fun topic of conversation, but if personal bankruptcy is something that could be in your future, it’s important to understand what you’re facing.
The first thing to understand is that bankruptcy, as scary as it sounds, won’t leave you penniless. On the contrary – it can actually lessen what you owe. Under the U.S. Constitution, debtors have the ability to relieve all or part of their debts when they can no longer meet those obligations. And most bankruptcy filings initiate an “automatic stay” that immediately protects against creditors that are seeking to collect – meaning no more phone calls or collection notices.
Understanding the Bankruptcy Process
Bankruptcy is designed to give people who can no longer pay their debts a fresh start—either by liquidating certain assets to pay creditors or by creating a structured repayment plan. The process typically begins when an individual (or spouses, together) files a petition in federal bankruptcy court. Once filed, the court steps in to oversee the case, following rules set forth in the U.S. Bankruptcy Code.
Types of Bankruptcy for Individuals
There isn’t a one-size-fits-all bankruptcy. In fact, there are several different types—each referred to by their “chapter” in the Bankruptcy Code. For most private consumers, the main options are:
- Chapter 7: Often called “liquidation bankruptcy,” this type allows for the discharge of most debts after certain qualifying assets are sold to pay creditors.
- Chapter 13: This option reorganizes your finances under a court-approved repayment plan, typically lasting three to five years, helping you pay back all or part of your debts over time.
While bankruptcy might sound like the end of the road, it’s really a legal tool—one that’s helped millions of Americans reset their financial lives and move forward with less stress and more control.
Let’s take a closer look at these types of bankruptcies.
There are multiple types of bankruptcies – and two major types that apply to private consumers: Chapter 7 and Chapter 13. Both types result in a discharge of debt, meaning your obligation to pay certain debts will be erased. The difference between the two is how you get to the discharge: Chapter 7 focuses on the elimination of debt by discharging all or part of the debt, while Chapter 13 focuses on the reorganization of your finances by establishing a payment plan to repay all or part of the debt.
While Chapter 7 and Chapter 13 are the most common forms for individuals, it’s helpful to know that other types of bankruptcy exist for different situations:
- Chapter 9: Designed for municipalities like cities, towns, and school districts that need to reorganize their debts.
- Chapter 11: Typically used by businesses that wish to restructure and continue operating rather than liquidate.
- Chapter 12: Offers specialized debt relief for family farmers and fishermen facing financial hardship.
- Chapter 15: Applies to bankruptcy cases that involve parties or assets in more than one country.
For most people dealing with personal debt, though, Chapter 7 and Chapter 13 are the primary routes. Let’s take a closer look at these types of bankruptcies.
Let’s take a closer look at these types of bankruptcies.
Chapter 7
Chapter 7 will discharge all or some of your debts after your liquid assets are used to repay some of the debt. “Liquid assets” are things you own that can be converted into cash quickly and easily. Your liquid assets are classified into exempt (cannot be used to repay creditors) and non-exempt (must be used to repay creditors). Non-exempt liquid assets must be handed over or distributed among your creditors as partial repayment of your debt.
Exempt property that you should be able to keep are things like your clothes, household furnishings, jewelry (up to a certain value), your car (up to a certain value), tools of your trade (up to a certain value), your pension, welfare or social security payments, and a portion of your home’s equity. Non-exempt items that you might be forced to relinquish include items like your coin collection, valuable family heirlooms, bank accounts and other investments, your second car, and your vacation home.
After all your non-exempt liquid assets have been doled out, any remaining debt is discharged – and you get to keep your exempt assets. Better yet, creditors can’t send third-party collectors to hound you for any remaining debts.
Chapter 13
Under Chapter 13, you repay all or part of your debt through a three- to five-year repayment program. You make a monthly payment to a Chapter 13 trustee for 36 to 60 months. The trustee distributes your payments to the creditors who have filed proper claims.
Regulations Governing Trustee Payments
So how are trustee payments handled during bankruptcy? The answer lies in federal regulations, specifically under laws like 11 U.S.C. § 330(e). In short, these rules set the standards for how much trustees—the folks responsible for overseeing your bankruptcy case—can be paid for their services.
The court authorizes trustee compensation, and there are strict guidelines in place:
- Fees are Capped: The amount trustees can collect is limited by statute to keep the process fair for everyone involved.
- Payment Structure: In Chapter 13 cases, trustees typically receive a percentage of the payments you make under your repayment plan. This percentage is also capped (usually at 10% or less of funds collected), and trustees are required to account for every dollar.
- Court Oversight: All trustee compensation is subject to court supervision. The trustee submits a detailed report reflecting services rendered and payments received, ensuring transparency throughout the case.
Ultimately, these regulations help make sure your payments are distributed properly and that trustees act in the best interest of both the debtor and the creditors. This oversight helps keep the process honest and above board, so you can focus on completing your repayment plan.
When you file for Chapter 13, you have to submit a repayment plan to the court. After a review, which can take several weeks, you will be called in for a hearing to approve your payment plan. Keep in mind that your creditors will have the opportunity to object to your plan or your proposed payment amounts at this point, although the judge can overrule them. When your plan has been approved, you’ll need to make all planned payments to the trustee. Once you’ve completed all planned payments, any remaining debt is discharged.
Which Forms Should You Use?
When it comes time to actually file for bankruptcy, the forms you’ll need depend on your situation:
- Individuals and Married Couples: If you’re filing on your own, or jointly with your spouse, you’ll need to complete the personal bankruptcy forms. These are standardized forms designed specifically for individuals and couples. Sole proprietors—meaning you run a business that isn’t legally separate from yourself—should also use these forms.
- Businesses: If you’re filing on behalf of a business entity—like a corporation, partnership, or limited liability company (LLC)—you’ll use the corresponding forms for non-individual filers.
Be sure to gather all the necessary paperwork before you begin the filing process. Having the right forms from the start can help the process go more smoothly and minimize headaches down the road.
How Do You Qualify?
To qualify for Chapter 7, you must first pass a “means test” to prove that your earnings are less than the median income for your family size in your state. If you can’t pass the means test because you earn “too much,” you will need to opt for Chapter 13 instead. But there’s a debt cap for Chapter 13: You can’t have more than $1,184,200 in secured debt and $394,725 in unsecured debt.
For both types of bankruptcy, you must also sign up for credit counseling from an approved credit counseling agency. And while it’s not required, it’s recommended to seek advice before filing for bankruptcy. Because of the complexity of personal bankruptcy laws, getting professional legal counsel will ensure that your application is filed completely and accurately.
Fee Waivers: Can Bankruptcy Filing Fees Be Waived?
If the cost of filing for bankruptcy feels like just another brick in the wall, there’s a bit of good news. For those considering Chapter 7 but struggling to cover court fees, there are special provisions to help ease the burden.
If your income is below 150% of the federal poverty line and you can show you’re unable to pay the court fees in installments after factoring in your basic living expenses, you can apply for a fee waiver directly with the court. This means you might be able to file for Chapter 7 without paying the standard filing fee. The court will review your application—and may ask for documentation or a brief hearing—to determine if you qualify.
It’s a good idea to gather paperwork showing your income, monthly expenses, and any other financial hardships before applying. Legal aid organizations like Legal Services Corporation, or pro bono local attorneys, can offer guidance and help with the application process if you need extra assistance.
You don’t have to let upfront costs be the final stumbling block. With the right documentation and a little perseverance, a waiver can keep bankruptcy within reach when you need relief most.
Filing Without an Attorney: Is It Possible?
If you’re wondering whether you need a lawyer to file for bankruptcy, the short answer is no—you can technically go it alone. This process is known as filing “pro se.” While you have every legal right to tackle bankruptcy paperwork on your own, keep in mind that bankruptcy law is intricate, with plenty of paperwork, rules, and court deadlines to navigate.
Most experts—from legal aid groups to organizations like the American Bar Association—stress that filing pro se can be overwhelming. Simple mistakes or missing information can delay your case, or worse, result in your petition being dismissed outright. If you’re considering the DIY route, it’s crucial to educate yourself thoroughly and perhaps consult reputable guides or nonprofit credit counseling agencies.
But for many, investing in professional legal advice is well worth it. An attorney can help ensure your paperwork is accurate, protect your assets to the fullest extent, and guide you through court proceedings—helping you sidestep costly errors or surprises along the way.
Why Choose Chapter 13 Over Chapter 7?
Some people who are eligible for Chapter 7 elect to file for Chapter 13. Remember that Chapter 7 requires you to relinquish your non-exempt liquid assets, while Chapter 13 allows you to keep these assets. Say you have a car loan, which is a secured debt. If you opt for Chapter 13, you can continue making those payments so you can keep your car.
What Are the Repercussions of Filing for Bankruptcy?
Bankruptcy is a complex issue full of both positive and negative consequences. Sure, you’ve been cleared of your debt, but your credit score will take a big hit. You’ll likely be recognized as a risk to lenders, so (for a while, at least) any loan you can qualify for will carry mega-high interest rates. Also, while bankruptcy erases your past debt, it won’t erase its history. The bankruptcy will remain on your credit report for many years, and that’s in the public record.
Where to Find Help With Bankruptcy Fees, Forms, and Procedures
If you’re gathering information or need assistance with the process, there are several resources at your disposal:
- Bankruptcy Fees and Waivers: Look to nonprofit legal aid organizations, such as Legal Services Corporation and National Foundation for Credit Counseling, for guidance on typical bankruptcy filing costs and whether you might qualify for a fee waiver.
- Bankruptcy Forms: Organizations like Nolo and Upsolve offer user-friendly explanations and access to the forms required for various types of bankruptcy, making it easier to navigate the paperwork.
- Fee Waiver Procedures: If you’re facing financial hardship, both local legal clinics and national nonprofits like Upsolve can walk you through the process of applying for a fee waiver or reduced-cost filing.
- Keeping Your Information Secure: For advice on handling sensitive tax information during bankruptcy, seek out reputable financial advice sites such as NerdWallet or Credit Karma, which provide up-to-date guidance on privacy and compliance.
- Staying Updated: The bankruptcy process isn’t set in stone—forms and requirements may change. Nonprofit credit counseling agencies and websites like Nolo regularly update their resources to reflect the latest procedures.
Before you file, it’s wise to explore these sources for reliable, easy-to-understand explanations and support throughout your bankruptcy journey. This preparation can help you avoid confusion, missed steps, and costly mistakes as you work toward a fresh financial start.
If you’re shouldering a crushing debt load, filing for personal bankruptcy might be an option to help you regain your financial footing and get off to a fresh start. But remember, bankruptcy is not a simple cure-all for out-of-control debt. If you don’t ALSO adjust your relationship with money, you could wind up repeating your past mistakes. If you’d like to talk through these options or investigate strategies to improve your financial track record, contact American Credit Foundation today.