Bankruptcy Basics: What Is Bankruptcy & How Do I File?

A bankruptcy case is a legal course of action that puts your debt behind you so you can get a fresh start. Bankruptcy is so specialized that the U.S. legal system gave bankruptcy cases its own set of courts and laws. The rules for a bankruptcy case are under the laws of the federal United States Bankruptcy Code, and cases are heard in U.S. bankruptcy courts. 

Want to learn more? We’ll give you a short explainer on bankruptcy basics, including what types of cases you can file, how to file bankruptcy, and what to expect from the bankruptcy process. Not sure if you need an attorney? We’ll show you how to think about that question and talk about when it’s a good time to hire a bankruptcy attorney for legal action. 

What is a Bankruptcy Case?

 A bankruptcy case is a federal court case held in bankruptcy court that puts all your debt on the table. The goal of bankruptcy for the bankruptcy filer (you) is to get a bankruptcy discharge. An order of discharge will remove your personal liability for the discharged debt, and you won’t owe anything for that debt. 

Discharged debt is usually unsecured debt, such as credit card debt, medical bills, back rent, charge offs, and even old cell phone bills. All debt can’t be discharged in bankruptcy, for instance, recent tax debts are rarely discharged. Child support and alimony won’t get discharged, and you won’t get court fines, criminal penalties, or court-ordered DUI liabilities dismissed. 

When you start your bankruptcy case by filing a petition, you get an automatic stay that stops most collection activity. Aside from a few exceptions, collections, wage garnishments, bank levies, foreclosures, and evictions will stop because of the bankruptcy filing, at least until the court sorts out the debt. At the end of the case, a bankruptcy discharge permanently stops collection activity for discharged debt. 

What Type of Bankruptcy Case Should I File?

Chapter 7 and Chapter 13 bankruptcies are the types of bankruptcy cases most used by individuals. Businesses use Chapter 11, farmers use Chapter 12, and if a city files bankruptcy, they file a Chapter 9 bankruptcy. An international business can file a Chapter 15 bankruptcy. We’ll keep this conversation about Chapters 7, 11, 12, and 13 bankruptcies. 

Chapter 7 Bankruptcy

If bankruptcies had a popularity contest, Chapter 7 would win. Chapter 7 is a straightforward liquidation bankruptcy, which is great if you don’t have any assets and your debt is unsecured dischargeable debt. Chapter 7 is also the quickest bankruptcy, as cases are usually resolved within four to six months. The basic idea is that assets are sold to pay debt, and the debt that can’t be paid is discharged.

In Chapter 7, the bankruptcy trustee will oversee the bankruptcy proceeding and review your personal financial information. You’ll also have to attend financial counseling sessions and a 341 Meeting of Creditors. (Creditors often don’t attend this meeting.) 

The 341 meeting is usually the only hearing you’ll have to attend, unless you have a less straightforward case. (Chapter 7 bankruptcy is a “straight” bankruptcy because most Chapter 7s are simple and straightforward.) After you’ve filed a bunch of bankruptcy forms, attended your counseling sessions, and attended your hearing, you’ll get your bankruptcy discharge order and your debt is gone! There are some formalities after discharge to close the case.

Your income limits must qualify you for Chapter 7 bankruptcy, and a means test in the form of a specific bankruptcy form must be completed. If your income is too high, consider filing a Chapter 13 proceeding.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy repayment plan is based on your debt and income after necessities (your disposable income). It’s created for individuals, not corporations or partnerships—but self-employed individuals, including sole proprietors, can use a Chapter 13 repayment plan. This type of bankruptcy takes about three to five years, and you’ll have to start making payments within 30 days after you file. 

If you don’t make the payments, your case is dismissed, your debt isn’t discharged, and collection activity continues. Nearly half of the cases are dismissed because of repayment failure. When you make repayments as agreed, collectors can’t bother you with collection efforts while you’re going through the bankruptcy process. 

Chapter 13 bankruptcy is beneficial for someone who has regular income and assets and debt that’s gotten out of hand. If your home is in foreclosure, you might be able to save it with a Chapter 13 bankruptcy plan if you can make monthly payments. If you’ve made years of mortgage payments and have equity in real estate, or you have co-signers you want to protect, consider filing a Chapter 13. 

Even though Chapter 13’s nickname is the “wage earner’s plan,” the income considered for repayment plans includes more than wages. For example, Social Security income isn’t counted on a Chapter 7 Means Test, but in some states, it can be used to fund a Chapter 13 plan, if the filer wants. The Chapter 13 Means Test has a calculation to determine your disposable income. In Chapter 13 your unsecured debt limit is close to $400,000 and secured debt limit is slightly over $1 million. 

Chapter 13 has more steps than a Chapter 7 bankruptcy. The repayment amount is proposed by you and reviewed by the trustee, and your creditors. Creditors need to file a bankruptcy form called Proof of Claim if they want to get paid, and they can object to a repayment plan. It’s extremely wise to have an attorney represent you in a Chapter 13 case, the statistics on pro se Chapter 13 filings are dismal. One report showed that less than 2% of solo pro se filers got their debts discharged. Nearly half the cases with attorney representation succeed in getting an order of discharge.

A bankruptcy trustee will take payments, determine exempt and non-exempt property, review creditor claims, and pay the creditors. You only have to worry about paying the trustee. You won’t have to deal with creditors. Chapter 13 gives you an automatic stay and all collection activity has to stop as soon as you file. Counseling courses are also required.

When the repayment plan is complete, you’ll get an order of discharge from the bankruptcy court that releases your personal liability for debt paid in the repayment plan. There are some hardship exceptions to finishing a repayment plan in order to get a discharge if you have a life-changing event beyond your control. 

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is the “reorganization” bankruptcy proceeding that rescues businesses. It’s expensive. Corporations, partnerships, and sole proprietors can file a Chapter 11 bankruptcy as well as individuals. Under this Chapter, a business can keep operating while debts are reorganized and repaid. The court filing fee alone is more than $1,700, and the U.S. Trustee is paid a quarterly fee which can be as high as $30,000. If your business has under $2 million in debt, you could qualify as a small business. There are also unique provisions under the Bankruptcy Code if you own only one real property asset, such as an apartment complex.

The filer has responsibilities akin to those a trustee would have in a Chapters 13 or 7 case, and the filer must adhere to accounting regulations and the Bankruptcy Code. A bankruptcy trustee may be appointed to oversee the bankruptcy proceeding, but that does not happen in all cases. Monthly reports about business operations are submitted to the U.S. Trustee’s office, and certain business operations must be approved. 

In Chapter 11, the filer must confirm a plan based on assets and liquidation values. The confirmed plan becomes the new contract for the debt. In some cases, Chapter 11 is converted to a type 13 or 7 bankruptcy. If your business is a family farm or fishing business, a Chapter 12 bankruptcy is an easier option for debt relief. 

Chapter 12 Bankruptcy

The Chapter 12 bankruptcy process was created for family farmers and now also applies to commercial fish farms. The farm business can be an individual or a corporation, and total debt is around $4 million for a family farm and just under $2 million for a fish farm. Your farm must produce a “regular” annual income. (Regular includes seasonal.) 

It offers a repayment plan similar to Chapter 13 and it’s cheaper than a Chapter 11 case. The bankruptcy trustee is specialized since there are only about 500 cases filed per year. The trustee will evaluate the operations, collection payments, and make payments to creditors. An automatic stay is applied in Chapter 12, and after the repayment plan is complete, an order of discharge can be made. The Chapter 12 process will take about five years. 

How Do I File For Bankruptcy?

Filing a bankruptcy petition starts your case, but you must take a court-authorized credit counseling course in the 180 days before you file. The court has a list of approved agencies, but to make sure you have the best possible experience, consider checking if the agency is certified by the National Foundation for Credit Counseling (NFCC) and what the Better Business Bureau (BBB) says about them. 

Get your paperwork together before you talk to the counselor and before you file your bankruptcy petition. The petition is long, and this can be the most difficult and time-consuming step. All creditors and their contact information must be listed to stop collection activity and potentially get the debt discharged. Perhaps the most important thing you can do to help yourself is to make sure complete and accurate creditor information is on your bankruptcy petition. Getting a fresh copy of your credit report can help, and you can also monitor your credit score. 

Documents to collect:

• Credit cards and credit card statements

• Personal loan statements

• Medical bills

• Bank account statements

• Legal documents, including garnishments, judgments, levies, and summonses

• A list of every company you owe money with the address and amount of debt owed

• Tax documents from the last two years

• Mortgage agreement

• Car loan agreement

• Student loan agreements

• Titles

• A list of your monthly, yearly, and occasional expenses

• Proof of income

You must pay a court filing fee to file the petition with the court. Installment plans and waivers are available based on income. The fee amount will depend on what type of bankruptcy you’re filing. 

What Happens After I File My Case?

Once you file your bankruptcy petition, your case is assigned a number and has officially started! The automatic stay goes into place, and the court sends a notice to the creditors on your bankruptcy petition. Regardless of what chapter you filed, more documents must be provided to the trustee, and you must attend a 341 Meeting of Creditors. In a Chapter 7 case, most of the hard work is done before filing the petition. The timeline for a Chapter 13 case is longer, and you’ll have responsibilities for the next 3-5 years. 

Before you get your discharge, you’ll have to take a financial management course. If you don’t take this financial management course you won’t get your discharge and you’ll be stuck with your debt! When you finish your Chapter 7 or Chapter 13 bankruptcy process, you’ll get your order of discharge and your discharged debt is gone forever. It’s imperative that you keep your discharge order in a safe place because you’ll need it for proof later. 

When Should I Hire A Bankruptcy Lawyer

If you feel you need legal advice, you should hire an attorney. You can represent yourself in bankruptcy court pro se, but that isn’t always the best idea. Bankruptcies under Chapters 11, 12, and 13 are complex, and creditors object more than under a Chapter 7 bankruptcy case. Hiring a lawyer is a wise investment because your valuable assets, business, or farm are protected with knowledge of bankruptcy and property laws— saving you money in the long run. If you don’t have assets but you have debt, you can use Upsolve’s screener to see if we can help you file a Chapter 7 bankruptcy pro se.