Bankruptcy is a legal process in the United States that allows people and companies to totally erase or reduce their debt, depending on the type of bankruptcy. There are two main types of bankruptcy for consumers: Chapter 7 bankruptcy and Chapter 13 bankruptcy. The main type of bankruptcy for businesses is Chapter 11 bankruptcy.
The bankruptcy code is federal law. Each year, personal bankruptcy laws help hundreds of thousands of Americans get a fresh start.
Who usually files bankruptcy?
People usually file bankruptcy when they have more debt than they’ll ever be able to pay back. Most people file bankruptcy after losing a job, a medical illness, a divorce, or a small business failure.
Many people decide to file after experiencing wage garnishment, a debt collection lawsuit, a repossession, or a foreclosure.
In the coming months, many people will use the safety net of bankruptcy to recover from the loss of their regular income due to COVID-19, especially if they’re dealing with high credit card interests rates.
What debt does bankruptcy erase?
Chapter 7 bankruptcy can help totally erase the following common debts:
Credit card debt
Personal loans and payday loans
Judgments from debt collection agencies
The moment someone files bankruptcy, a rule called the automatic stay goes into effect, which temporarily prevents creditors from collecting any debts that a filer owes them.
What debt doesn’t bankruptcy erase?
Child support and alimony
Most government debts like recent taxes and fines
It’s rare for student loans to be erased
What’s the difference between Chapter 7 and Chapter 13 bankruptcy?
Chapter 7 is the type of bankruptcy typically used by lower-income families with minimal assets to totally erase certain debts, including credit card and medical debt. Chapter 13, more common among homeowners, involves partially repaying creditors over three to five years, while being able to keep more expensive property.
What are alternatives to bankruptcy?
When you’re in a tough financial situation and can’t recover by cutting expenses or increasing income, you have three major alternatives to bankruptcy: debt settlement, debt consolidation, and credit counseling.
Debt settlement, often referred to as debt relief, involves legally settling a debt for less than you owe and can be done by yourself or with a debt settlement company.
Debt consolidation consists of combining your debts into a single loan with a lower interest rate.
Credit counseling followed by a debt management plan involves repaying your creditors over time at reduced interest.
Each of these options has pros and cons. None of them involve totally clearing credit card and medical debt.
How do I file bankruptcy and how long does it take?
Bankruptcy is a legal process where you fill out several forms about your financial situation, submit those forms to the court, and meet with a court official to review the forms.
The bankruptcy forms that you file are known as your bankruptcy petition. The court official is known as the bankruptcy trustee, and the meeting with the bankruptcy trustee is called the 341 meeting of the creditors.
The 341 meeting takes place at the bankruptcy court about one to two months after you file. The trustee asks basic questions about what’s in your forms. If all goes well, two to three months later, you’ll get a letter in the mail that your debt is officially discharged.
In a Chapter 13 bankruptcy, the filer proposes a repayment plan based on their ability to repay certain debts. The bankruptcy trustee and all creditors review the Chapter 13 plan and, if it’s acceptable to all involved, the court confirms the repayment plan, which spans three to five years.
How much does bankruptcy cost?
Filing for Chapter 7 bankruptcy requires a $335 filing fee, payable in installments. Chapter 13 bankruptcy requires a $310 filing fee. If you earn below 150% of the Federal Poverty Line, you may qualify for a fee waiver when filing your forms. You will also need to complete an online course that usually costs somewhere between $10 to $50.
The most expensive bankruptcy costs, if you hire an attorney, are the attorney fees. It costs an average of $1,500 to hire a bankruptcy attorney for a Chapter 7 case, and most of them require the full amount to be paid before the bankruptcy case is filed with the court.
Attorney fees in Chapter 13 bankruptcy cases are significantly higher, usually starting around $3,000, though you can usually pay a portion of it through the Chapter 13 repayment plan.
Will bankruptcy hurt my credit score?
In our experience, bankruptcy often helps people with low credit scores (below 600) improve their credit scores in the near term. People with higher credit scores often see their credit decrease in the near term. Everyone has a chance to rebuild their credit over time by using tools like secured credit cards.
Chapter 7 bankruptcy remains on your credit report for 10 years and Chapter 13 bankruptcy remains on your credit report for 7 years.
Will I lose all my stuff if I file for bankruptcy?
No, you will not lose all of your stuff when you file for bankruptcy. In 95 percent of Chapter 7 bankruptcies, filers are able to keep all of their property.
The bankruptcy laws have rules in place called “exemptions” that allow you to keep several different types of property, such as your cash, clothes, furniture, cars, etc. up to a certain dollar amount, known as “exemption limits.”
The specific exemptions you can use to protect your property may depend on your state. If your property value exceeds the exemption limit that applies, the trustee may seize the property, sell it, and split the proceeds from the sale with your creditors. Property that isn’t protected by exemptions is considered “non-exempt property.”
Can bankruptcy clear student loans?
It’s possible to clear your student loans in bankruptcy, but it’s very rare. Challenging your student loans in bankruptcy requires you to file a lawsuit against your student loan creditor within your bankruptcy case, proving that having to pay back the student loan debt would cause you “undue hardship.”
In cases of private student loans, you may also be able to claim that the private student loan was “unqualified” and not actually a student loan if you used it for expenses unrelated to education, your school is unaccredited, etc.
How can a bankruptcy attorney help me?
A bankruptcy attorney can give you legal advice on whether you should file for bankruptcy, based on your specific situation. If you decide to hire them to file your case, you will either have a conversation with a paralegal or an attorney. They’ll collect all the information they need from you to complete your bankruptcy forms.
They will then file your bankruptcy forms for you and show up with you to the Meeting of Creditors. You can trust a bankruptcy attorney to act in your best interest due to the rules of an attorney-client relationship.
You can usually find a bankruptcy lawyer’s phone number in the top right corner of their website to learn more about how their office works.
How can I find a bankruptcy attorney near me?
You can find a consumer bankruptcy attorney in several different ways. Upsolve has a free tool to allow you to connect with a bankruptcy attorney for a free evaluation. The National Association of Consumer Bankruptcy Attorneys (NACBA) also has a tool that can help you.
Your local bar association may have a referral service and your local legal aid organization may have pro bono bankruptcy lawyers available, such as Legal Services New York for NYC residents.
Most bankruptcy attorneys will provide you with free consultations, so it doesn’t hurt to talk to a few lawyers before deciding.
Some people prefer “bankruptcy mills,” law firms that do a high volume of bankruptcy filings at more affordable costs, while others prefer more hand-holding from a bankruptcy attorney at a lower volume law firm who may, for example, be able to exchange text messages with you during your case.
Last year, Upsolve helped more people file bankruptcy than any other nonprofit in America.
Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.
Try our 100% free tool that thousands of low-income families across the country have used to file bankruptcy themselves. We are funded by Harvard University, will never ask you for a credit card, and you can stop at any time.