Bankruptcy. To many people this is a frightening word. To those people, this word means financial ruin or failure. However, the reality is that hard financial times can fall upon anyone, at any time. Sudden job loss, mounting medical bills, credit card debt that gets out of hand, home repair or vehicle repair expenses are all issues that happen to regular people.  Maybe you are just barely getting by, maybe you are getting collection calls and letters saying you’ve fallen behind, maybe you are dealing with a lawsuit or judgment or even a wage garnishment.  These are all unfortunate and unpredictable issues that can affect anyone.

Types of Bankruptcy

What do you do if you find yourself in this situation? Bankruptcy is not always the answer, but it’s worth discussing.  There are two common types of consumer bankruptcy – chapter 7 and chapter 13.  Not everyone who considers bankruptcy will qualify to file.  Federal law outlines what is called the means test.  This is the review of household monthly income and expenses to determine if a filer qualifies for bankruptcy relief.  If the monthly income is below a certain set amount, the filer will pass the means test and be able to file for bankruptcy.  If the monthly income is not below the level set out by law, the filer must prove their reasonable monthly expenses to show that their disposable income is within a certain amount.  Individuals or couples who file and meet this requirement will qualify for chapter 7 bankruptcy.  Those who do not qualify, but still have debts in excess of what they are able to pay each month, may qualify for chapter 13 bankruptcy relief.  Chapter 7 is the most common type of bankruptcy.  With this, the debtor gets a discharge of all eligible debts listed in the bankruptcy petition.  With a chapter 13 the debtor makes payments toward their debts over the course of 5 years, with the balance on those debts being discharged at the end of the payment period.

Filing for Chapter 7 Bankruptcy

One important concern that many people have is whether they can keep their home or their vehicle if they file for bankruptcy.  The law does allow specific exemptions, which allow individuals filing bankruptcy to keep certain property, up to a certain value amount. For filers who have a home with minimal equity or still have a mortgage, then they are likely to be able to keep their home. With vehicles, it depends on the value. However, there are ways to help protect a vehicle as well as a home in most chapter 7 bankruptcy cases.

If you qualify to file for chapter 7 bankruptcy, the next step is to gather up important financial documentation.  Some of the items needed include mortgage statements, tax returns, pay stubs, W-2s, documentation on assets, and copies of medical bills. While the attorney works to prepare the bankruptcy petition, the debtor should be completing a credit counseling course. This is a required step for all individuals and couples filing bankruptcy.  The attorney will review the completed bankruptcy petition with the debtor and will file everything needed with the court.  Once the case is filed, the court will assign a date for the debtor and attorney to meet with the bankruptcy trustee.  This is typically about 3-6 weeks after the filing of the bankruptcy case.  Also, once the petition is filed, the automatic stay is in effect.  The automatic stay is an order from the court that all creditors of the debtor stop any and all collection efforts while the case is pending. This means that any calls or letters that are received from creditors must stop immediately once the case is filed. This is usually a relief for filers.

After the case has been filed, the debtor must complete a second credit counseling or financial management course.  At the date of the meeting with the trustee, the debtor and the attorney will answer a few simple questions that the trustee may have from the review of the bankruptcy petition.  This is not a scary event.  The trustee is simply verifying information listed on the petition or getting clarification on any issues raised in the filing.  For most debtors, the meeting with the trustee is brief and straightforward.  If any creditors wish to question the debtor or wish to dispute anything on the petition, they can also attend the meeting with the trustee to ask questions.  However, it is not common for creditors to attend these meetings.

What happens next?

After the chapter 7 bankruptcy has been filed, the debtor has completed the post-filing credit counseling, and the meeting with the trustee has occurred, then it is time to wait for the court to issue its final discharge order. This typically will come about 2 months after the meeting with the trustee.  The discharge order will discharge or “wipe out” all of the eligible debt listed on the petition. Some of the debts that cannot typically be discharged in chapter 7 bankruptcy include most taxes, student loans, alimony or child support, and debts related to a personal injury judgment.

The bankruptcy is complete – now what? It is important for individuals to work on their personal finances to recover from bankruptcy.  The filing of bankruptcy will continue to be reported on a credit report for approximately 7 years.  A debtor who gets a bankruptcy discharge cannot file for bankruptcy again for 8 years, according to federal law.  This means that many of the less desirable creditors, such as high interest credit cards, target bankruptcy filers because they see an easy way to make money. They know that the debtor may be looking for credit, but that the debtor will have to pay the debt since they can’t file bankruptcy again for 8 years. Alternatively, some other creditors, such as mortgage lenders, may not be so eager to loan money to the debtor immediately following a bankruptcy discharge.  However, there are ways to bounce back. Debtors can continue paying on reaffirmed debts, such as existing mortgages or car loans. They may choose to obtain a low limit credit card for small purchases such as fuel or groceries, paying toward the balance regularly. This can help to improve a credit score over time.  Many individuals who receive a discharge in bankruptcy go on to purchase homes, vehicles, and otherwise substantially improve their financial situation.

It’s important to not be intimidated by bankruptcy. It is meant to be helpful for those who really need it.  Generally, bankruptcy does help and most people come out of it feeling relief and optimism.