How to get debt relief through personal bankruptcy

Debt relief through personal bankruptcy is available to all Americans. Whether you’re drowning in medical bills, faced with impossible to pay off credit card debt, or unable to make your payments as they come due after losing your job, filing bankruptcy can help you. This article will provide an overview of the two different types of personal bankruptcy and how each can provide you with a fresh start. 

What is personal bankruptcy? 

Bankruptcy is a legal process to reorganize or eliminate - or discharge - someone’s obligation to pay all or some of their debts. The Bankruptcy Code provides both protections for filers and a system to treat creditors fairly under the law. Personal bankruptcy is a case filed by an individual (or married couple) to get relief from debt. However, businesses, railroads, farms, and even towns and counties can get bankruptcy relief as well. 

Chapter 7 bankruptcy

Chapter 7 bankruptcy is what you probably think of as a traditional, or liquidation, bankruptcy. In Chapter 7, you can walk away from some, or all, of your debt and get a fresh financial start. Chapter 7 allows for the discharge of all of your unsecured debts, such as credit cards, personal loans, and medical bills. Certain obligations, like child support and alimony, are considered non-dischargeable debts that will survive a bankruptcy. 

To file for Chapter 7 you first have to show that you qualify through a means test in one of two ways. First, if you can show that your monthly household income is below the median income for your state (with the same household size) on your Current Monthly Income Statement form, you are immediately qualified to file Chapter 7. If you don’t qualify under the income threshold you still have the option to qualify via the Means Test Calculation form, which takes an in-depth look at your monthly income and expenses to see how much, if any, income is left over at the end of the month to go toward unsecured creditors. 

Chapter 7 cases are fairly quick, often completed with a bankruptcy discharge order four to six months after filing your case. Once you can verify that you qualify for Chapter 7 and have completed a required credit counseling course with an approved counseling agency you can complete and file your bankruptcy paperwork. In the bankruptcy forms, you will include information about all of your assets (everything you own) and all of your liabilities (everyone you owe.) It’s a good idea to get a copy of your credit report to make sure you include all of your debts. You can protect most (or all) of your assets up to certain dollar amounts through specific bankruptcy laws called exemptions. If you have nonexempt property, your Chapter 7 trustee (who oversees your case) can liquidate those assets (usually by sale) and distribute the proceeds among your unsecured creditors. 

After you file your official bankruptcy paperwork at the bankruptcy court, you’ll be assigned to a bankruptcy trustee who will preside over your required hearing, called the first meeting of creditors. You’ll need to provide additional documentation to your trustee before your hearing, and the trustee will go through your bankruptcy forms and supporting documents with you, under oath, at the hearing. After the hearing, you will need to complete another credit counseling course (again with an approved agency) and wait to receive your order of discharge. Once you have your discharge, the bankruptcy is over and you can move forward with your life. 

Chapter 13 bankruptcy 

Chapter 13 bankruptcy is also referred to as a reorganization. Chapter 13 includes a repayment plan, set up to run for three to five years, which can allow you to catch up on any secured debt (like a house or a car) when you have fallen behind. Unlike Chapter 7, there aren’t any income limits, but you do need to have enough money to fund the plan so that you can also afford your other monthly expenses. There are limits to how much debt you can have in Chapter 13, but usually, those are far higher than any amount of debt with a typical filer. 

Most people who choose to file Chapter 13 do so because they have fallen behind on a secured debt and are facing a foreclosure or repossession. As soon as you file bankruptcy, a rule goes into effect called the automatic stay, which stops any collection actions (including foreclosure, repossession, and wage garnishments) in its tracks. This allows for the chance to catch up which isn’t an option for Chapter 7. You can create a Chapter 13 plan that lets you spread out any arrearage (the amount you are behind) over the life of the plan, which is a minimum of three years and a maximum five-year repayment plan, which can make it feasible for you to catch up. 

Just like in Chapter 7, different types of debt get different treatment in Chapter 13. We’ve already looked at secured debt, which can be included in your plan along with any arrearage. Priority debt is still non-dischargeable in Chapter 13, but you can use your Chapter 13 plan to catch up on any arrearage you have on priority claims, like child support or alimony. When you are in Chapter 13 bankruptcy, your trustee will administer the plan, which means making sure that the payments go to the right place. So, if you’re behind on your mortgage, the trustee will pay the creditor your ongoing monthly payment through the plan along with a portion of the arrearage, spread out over the life of the plan. Unsecured creditors are also included, but they only receive a portion of the money owed, essentially whatever is left over that you can afford to pay into the plan. 

For your Chapter 13 plan to be approved (or confirmed), you will need to show that you are using your best efforts to pay all of your debts, which means paying somewhere between 1% to 100% of your unsecured debts. If your plan calls for less than 100% payment toward your unsecured debts and you complete the plan and receive your discharge, then any remainder of your unsecured debts is also discharged.

For people who don’t qualify for Chapter 7 under either arm of the means test, Chapter 13 bankruptcy is the only personal bankruptcy option. This is the situation for people who make too much money to file for Chapter 7. The same rules apply here, however, that you need to fund a plan with your best efforts, so you might only need to pay pennies on the dollar of your total unsecured debts and still be able to walk away from the bulk of them upon discharge.

Which type of bankruptcy will provide me the most debt relief? 

The type of bankruptcy that will give you the most relief will depend on your personal circumstances. Let’s start with how bankruptcy works on the most basic level, the bankruptcy basics. For either chapter, you will get the protection of the automatic stay as soon as you file your case. In both types of bankruptcy, once you receive a discharge you will no longer be obligated to pay any more on your unsecured debts - your personal liability is eliminated. So how do you choose which, if any, is best for you? Keep in mind that you might also want to consider nonbankruptcy methods of debt relief, like debt consolidation or a debt management plan. 

Largely it will depend on how much income you have and your monthly expenses to see if you have the option to file for Chapter 7. Additionally, it will also matter what types of debt you have. If you are behind on a secured debt for something that you want to keep, then you’ll need to file a Chapter 13 to do so. Before you jump into Chapter 13, however, you do need to make sure that it’s feasible for you to fund a plan. You’ll want to calculate out what you’d need to pay in to catch up on any arrearage, as well as the other costs and debts involved. Chapter 13 is more complicated and takes longer than Chapter 7, and has a very high failure rate.

What are the costs involved in filing personal bankruptcy? 

There are costs involved in filing any personal bankruptcy. Each chapter of bankruptcy has a court filing fee that is due in full at the time you file your case. Currently, for Chapter 7 the filing fee is $338 and for Chapter 13 the filing fee is $313. If you can’t afford to pay the filing fee and your income is below 150% of the poverty level, you can request that the fees be waived by filing a motion. You also can always request to pay the fee in installments, but it’s important to make sure that you follow the rules and timing for the payments or your case can get dismissed.

Beyond the filing fees, you’ll also have to pay for the credit counseling sessions. Each session will cost between $10 and $50. Many companies will offer both courses and might offer savings to pay for both together. Here again, if you can show that paying for these fees presents a hardship, they can be waived.

The biggest expense in any bankruptcy, as well as the most variable one, is the attorney fees. This can vary significantly depending on where you live, but as an estimate Chapter 7 will cost $750 - $1,500. Chapter 13 is more expensive, probably between $2,500 and $4,000 to get a case through confirmation. Chapter 13 fees can be paid through your plan so you don’t need to come up with that money upfront, but there can also be more fees during the life of your plan so it’s hard to say exactly what the total will be at the beginning.

Do I need a lawyer to file bankruptcy? 

You do not need a lawyer to file bankruptcy, but it often makes sense to do so. In particular,  if you are filing Chapter 13, it’s a really good idea to hire one. Chapter 13 is longer and more complex than Chapter 7, and as a result, has a very high failure rate. Having an attorney work with you gives you a much better chance of success in getting your Chapter 13 confirmed and eventually discharged. 

If you are filing Chapter 7 and the majority of your debt is unsecured (credit cards, medical bills, payday loans, student loans etc.) and you aren’t dealing with any expensive property, you’re probably fine filing the case on your own (“pro se.”) Even though Chapter 7 bankruptcy is much more straightforward, however, it’s still helpful to hire a bankruptcy attorney to help you through the process, if you can reasonably afford to do so. 

What if I can’t afford a lawyer for my Chapter 7 bankruptcy? 

If you can’t afford to hire a bankruptcy lawyer for your Chapter 7 there are several other options to explore. First, you can see if you qualify for legal aid assistance, where you can get help from an attorney at no cost. If you find yourself in an uncomfortable space where you don’t qualify for legal aid but you still don’t have enough money to hire an attorney, there are other resources available to you to help, including Upsolve. Upsolve is a nonprofit that offers a free web app that walks you through every step of your bankruptcy case.  Check out Upsolve’s screener to see if this is a good fit for you.