Bankruptcy is a legal process that allows individuals or businesses struggling with overwhelming debt to seek financial relief through court intervention. Depending on the type of bankruptcy filed—such as Chapter 7, Chapter 11, or Chapter 13—the process can involve liquidating assets to repay creditors or restructuring debt to create a more manageable repayment plan.
For many, bankruptcy provides a path to regain financial stability, but it also comes with legal consequences, such as credit score impact and limitations on future borrowing.
Understanding how bankruptcy works, who qualifies, and the potential alternatives is essential before making this critical financial decision.
What Does Bankruptcy Mean?
Bankruptcy is a legal process that helps individuals and businesses eliminate or restructure debt when they can no longer meet their financial obligations. It is governed by federal law under the United States Bankruptcy Code and involves court proceedings to either discharge certain debts or create a repayment plan.
There are different types of bankruptcy:
- Chapter 7 Bankruptcy – Also known as liquidation bankruptcy, this process involves selling non-exempt assets to repay creditors, with most remaining debts discharged.
- Chapter 13 Bankruptcy – Known as reorganization bankruptcy, it allows individuals with a steady income to develop a court-approved repayment plan over three to five years.
- Chapter 11 Bankruptcy – Primarily used by businesses, this form of bankruptcy allows for debt restructuring while continuing operations.
Filing for bankruptcy can provide relief from overwhelming debt, stop creditor harassment, and halt foreclosure or repossession. However, it also has long-term financial consequences, such as impacting credit scores and borrowing ability.
The bankruptcy process can be complicated because different rules and requirements govern each type. Generally, a debtor must provide financial information to the court when they declare bankruptcy, such as their income and expenses.
For Chapters 7 and 11, bankruptcies, the debtor must also submit a repayment plan within 14 days of filing for review by the bankruptcy judge overseeing their case. However, they can request an extension.
If a repayment plan is approved, the debtor must pay the Bankruptcy Trustee, who will distribute the owed funds to creditors.
What Does It Mean to File for Bankruptcy?
Many people mistakenly believe that filing for bankruptcy means financial failure or poverty. However, this is not true. Bankruptcy is a legal tool designed to help individuals and businesses manage overwhelming debt and regain financial stability. It offers a structured way to eliminate or restructure debt through court proceedings.
Before filing for bankruptcy, it’s important to consider alternative debt relief options, such as debt consolidation or negotiating repayment plans with creditors. These out-of-court solutions can sometimes provide relief without the long-term consequences of bankruptcy.
However, the Consumer Financial Protection Bureau (CFPB) warns consumers about the risks of working with debt settlement companies, as some may engage in deceptive practices.
Filing for bankruptcy can have a lasting impact on your credit score and financial future. Understanding how long it will remain on your credit report and how it may affect your ability to borrow is crucial. If bankruptcy is the right choice for you, developing a strategy for rebuilding your credit afterward is essential for long-term financial recovery.
Life after bankruptcy can be challenging but presents new opportunities for financial growth and long-term financial stability.
Filing for bankruptcy can be expensive, and you will have to pay the bankruptcy attorney ahead of time.
It’s crucial to approach the topic of bankruptcy with an open mind and seek professional advice before making any decisions.
By understanding the misconceptions surrounding bankruptcy and exploring all available options, you can make an informed decision about what is best for your financial future without compromising your safety and financial security.
Who Can File for Bankruptcy?
Anyone unable to pay their debts can file for bankruptcy in the United States, which includes individuals, married couples, businesses, and other legal entities.
In order to file for bankruptcy successfully, one must meet specific criteria, as their case could get dismissed. Generally, individuals with little to no income or debts that exceed their assets qualify for bankruptcy.
A person whose income is more than the median amount of their state of residence can not file a Chapter 7 bankruptcy, known as the “means test.” There are no incoming limitations for a Chapter 13 bankruptcy.
Additionally, those facing foreclosure or wage garnishment can stop the lender from foreclosing on them and stop their wages from being garnished.
Can a Bankruptcy be Denied?
Yes, your bankruptcy filing can be denied by the court. Chapter 7 bankruptcies almost never get denied, whereas the majority of Chapter 13 bankruptcies do.
When a debtor’s bankruptcy claim is denied, it usually happens for one of two reasons:
Reasons a Bankruptcy Can be Denied
- The person declaring bankruptcy has not met all of the requirements to file.
- The court finds that the person filing has attempted to defraud creditors or otherwise abuse the bankruptcy system.
Who do You File Bankruptcy With?
When considering filing for bankruptcy, knowing how and who you file with is essential.
First, it’s recommended to seek a Bankruptcy Consultation from an attorney or credit counselor to discuss your options to determine if bankruptcy is the best path for you.
Although it is not required for individuals and married couples to hire an attorney for bankruptcy filings, it is advisable. The attorney can help you navigate the bankruptcy system and get the best deal.
When you are ready to file, you will file it with the Bankruptcy Court in your jurisdiction.
The bankruptcy process begins with attending an approved Credit Counselor within 180 days before you can file. Once this and other requirements are met, you can file, and depending on the type, you can receive a Bankruptcy Discharge or payment plan.
Both of these options will provide debt relief.
A Chapter 7 bankruptcy will wipe out your debts, whereas Chapter 13 involves you making and getting a payment plan approved.
Working with professionals throughout this process will best ensure everything is done correctly and in accordance with the law.
How to Claim Bankruptcy?
Claiming bankruptcy is a serious decision and should not be taken lightly. Before deciding, consult a bankruptcy attorney or financial advisor to determine if bankruptcy is the best option. The eligibility criteria for filing for bankruptcy vary depending on the type of bankruptcy you are filing for.
Some common types of bankruptcy include Chapter 7, Chapter 11, and Chapter 13 bankruptcies. Understanding each type’s differences and which one suits your financial situation best is crucial.
Additionally, there are specific bankruptcy exemptions that you may be eligible for, allowing you to keep certain assets that are exempt from the bankruptcy process, such as your home.
To claim bankruptcy successfully, follow these steps to get started:
- Determine our eligibility: Ensure you meet the eligibility criteria for filing bankruptcy.
- Choose a bankruptcy type: Decide which type of bankruptcy meets your financial needs.
- Bankruptcy exemptions: Research the available exemptions in your state to determine which assets you can keep during the process.
By following these steps, you can take control of your financial future and move towards a more secure end without sacrificing everything you own.
Remember, claiming bankruptcy is not an easy decision to make or a process to go through, but it can be necessary to achieve financial stability again.
Can Punitive Damages be Discharged in Bankruptcy?
Yes, under certain circumstances, punitive damages can be discharged in bankruptcy. The likelihood depends on the chapter of bankruptcy you file and the laws of your state.
Generally, judgments from punitive damages are not discharged in both Chapter 7 bankruptcy and Chapter 13 bankruptcy if the punitive damages were awarded to the plaintiff for your having willful or malicious intent.
How Much Does It Cost to File Bankruptcy?
The average cost to file for bankruptcy depends on the type of bankruptcy and the state you file in. Chapter 7 bankruptcy is the most affordable.
Cost of Chapter 7 Bankruptcy
The Chapter 7 filing fee is typically around $335, and the cost of the attorney fees will be less than $2,000.
Cost of Chapter 13 Bankruptcy
Chapter 13 bankruptcies are more expensive as the attorney’s fee will cost around $3,000 or more, although the filing fee averages slightly less at around $310.
Cost of Chapter 11 Bankruptcy
The most expensive bankruptcy is Chapter 11 for companies, which will cost in the low thousands of dollars for the filing fees, and the attorney’s fee can easily be $20,000 or more.
Does Bankruptcy Affect Security Clearance?
Yes, bankruptcy can affect security clearance. Bankruptcy is seen as a sign of poor financial responsibility and can raise questions about an individual’s reliability and trustworthiness. Depending on the severity of the bankruptcy, it could result in the complete denial or even the revocation of an existing security clearance.
The same typically applies to getting denied employment.
Can Bankruptcy Stop Eviction?
Yes, bankruptcy can stop an eviction. In most cases, filing for a Chapter 7 or Chapter 13 bankruptcy will cause the automatic stay provision to be invoked, which will immediately stop the eviction proceedings and allow you to remain on your residential property.
However, the landlord can go to court and seek relief from the automatic stay. Nonresidential property is not covered by automatic stay law.
Does Filing Bankruptcy on Your Business Affect Personal Credit?
Yes, filing bankruptcy on your business, which is an LLC or corporation, can affect your personal credit if you are a personal guarantor for loan debt. If you are unable to pay what is owed to the lender in the bankruptcy filing, that will go on your credit record and affect your credit standing. Future lenders will view you as having a higher risk for future borrowing.
It is essential to understand that bankruptcy does not automatically clear all debts associated with the business and that you must be cautious when contemplating whether you should guarantee a commercial loan for a company in the borrowing process.
Can Bankruptcy Affect Citizenship Application?
Yes, bankruptcy can affect a citizenship application in certain circumstances, even though no law addresses filing for bankruptcy when applying to become a citizen. Depending on the type of bankruptcy, if an applicant has filed for bankruptcy within a certain amount of time before their citizenship application, they may need to provide additional evidence to demonstrate their financial stability.
The U.S. Citizenship and Immigration Services (USCIS) is very strict. In addition to evaluating whether an applicant is of good moral character, the USCIS will look into the applicant’s financial history.
They may require additional documentation regarding the bankruptcy.
If an applicant has gone through bankruptcy and discharged debts, they may need to provide proof that they repaid their creditors or that they obtained a discharge of those debts.
However, that info should already be made available within the audits and financial statements that must be submitted with the filed citizenship petition.
What to Bring to a Bankruptcy Consultation?
If you are considering bankruptcy, you must meet with a bankruptcy attorney for a consultation. Here are some things you should bring to your bankruptcy consultation:
- A list of all creditors and any account numbers associated with them
- A list of all assets, including real estate, vehicles, stocks, bonds, and bank accounts
- Your most recent pay stubs
- Your most recent tax returns
- A list of monthly living expenses
- Any court documents related to the bankruptcy (if applicable)
- A valid photo ID
- Any paperwork related to debts you’re trying to settle or stop collection efforts.
What Questions to Ask a Bankruptcy Lawyer?
If you are considering filing for bankruptcy, it’s important to meet with a bankruptcy lawyer for a consultation. Here are some questions to ask your bankruptcy lawyer:
Questions to Ask a Bankruptcy Lawyer
- What experience do you have in bankruptcy law?
- How often do you handle bankruptcy cases?
- What types of bankruptcy cases do you typically handle?
- What would be the best approach to my particular situation?
- What can I expect throughout the process?
- What fees will I be responsible for?
- What are some of the potential risks or drawbacks I should consider?
- Are there any alternatives to bankruptcy that I should explore?
- What should I do to prepare for filing for bankruptcy?
- How can I protect my assets from creditors?
