The number of Americans filing for individual bankruptcy is experiencing a significant increase this year. Filings for Chapter 7 bankruptcy, which is the most common type of personal bankruptcy, have risen by 15% during the first nine months of the year, as reported by Epiq AACER, a firm that specializes in tracking bankruptcy cases.
The “sharp rise” in bankruptcy filings compared to the same period last year underlines the escalating financial pressure faced by households across the nation. Michael Hunter, vice president of Epiq AACER, emphasized this point in a recent news release, indicating a worrying trend that could affect millions.
If you find yourself among the increasing number of consumers struggling with debt and contemplating bankruptcy, it’s crucial to recognize that this decision can adversely impact your credit score and restrict your borrowing capabilities for many years. However, for some individuals, filing for bankruptcy may represent a vital opportunity for a fresh start.
Here’s a comprehensive overview of the various types of personal bankruptcy and the procedural steps involved in filing for them.
Your Ultimate Step-by-Step Guide on How to File for Bankruptcy
Filing for bankruptcy is a federal process, meaning that the fundamental steps remain consistent across the country. However, local regulations can influence specific aspects of bankruptcy cases, particularly concerning property exemptions.
This guide is not intended to replace legal advice; instead, view it as a general roadmap outlining what it takes to effectively file for bankruptcy.
1. Why You Should Consult a Bankruptcy Attorney Before Filing
While it’s true that you can file for bankruptcy without a lawyer — a process known as filing pro se — we strongly recommend speaking with a knowledgeable bankruptcy attorney in your vicinity before you proceed. Engaging legal counsel can significantly enhance your chances of achieving a favorable outcome in your case.
Research indicates that receiving legal aid can greatly increase the likelihood of obtaining a “bankruptcy discharge,” which serves as a court order relieving you of the responsibility for some or all of your debts that you cannot repay.
Statistics from the American Bankruptcy Institute reveal that less than half of those who represent themselves in a Chapter 7 bankruptcy case successfully receive a discharge. In contrast, approximately 94% of individuals who have legal representation achieve this result. Moreover, Chapter 7 is often considered the simpler option for individuals to navigate independently. The success rates for pro se filers in Chapter 13 bankruptcy are even lower. (We will explore the differences between these two types of bankruptcy in detail below.)
It is advisable to consult with one or more local attorneys experienced in bankruptcy law. If you are concerned about the costs associated with hiring an attorney while under significant financial strain, there are options available. You may qualify for free legal aid through organizations listed above or other local services.
Many attorneys provide free consultations or online Q&A sessions. Take advantage of these resources. The non-profit organization Upsolve can assist you in finding free consultations, materials, and legal help at no cost.
Inquire with local attorneys about whether bankruptcy is the right path for your financial situation and whether you would meet the eligibility criteria.
Before incurring the expenses of filing the necessary bankruptcy forms and potentially tarnishing your credit report for up to ten years, explore other viable options such as debt negotiation or non-profit credit counseling. Many individuals who ultimately file for bankruptcy have already attempted these alternatives.
2. How to Organize Your Financial Documents for Bankruptcy
Once you have determined that bankruptcy is the appropriate course of action (and ideally confirmed this with an attorney), the next step is to prepare the necessary paperwork.
Before diving into the official bankruptcy forms, it’s essential to organize your personal financial documents effectively.
When you file for bankruptcy, you’re essentially notifying a federal court that you are unable to meet your financial obligations and are seeking assistance. Later on, you will need to substantiate this claim by revealing a variety of information concerning your financial situation.
Here’s a basic checklist of documents you will require as you navigate this process:
- Identification documents, such as your driver’s license and Social Security card
- Recent tax returns (typically the last four years)
- Proof of income, including pay stubs, W-2 forms, earnings from self-employment, income from assets, and any government benefits
- Bank statements and/or statements from retirement accounts
- Documentation proving the value of your assets, such as valuations for vehicles and real estate. You may also need loan balances, proof of insurance, monthly payment amounts, or other related documents.
- A comprehensive list of your creditors and the amounts owed
- A detailed breakdown of your monthly living expenses
Having these documents organized from the outset is vital. Firstly, it can assist in determining which type of bankruptcy you should pursue. Secondly, these documents, along with potentially others, may be requested by a bankruptcy trustee, who will be appointed to oversee your case.
3. What You Need to Know About Your Debt and Your Options
Having your financial paperwork organized will greatly assist you during this stage of the process.
It’s important to understand the nature of the debts you are looking to resolve. Certain obligations, such as child support, alimony, and specific tax debts, cannot be discharged in bankruptcy (and bankruptcy cannot pause wage garnishment for these types of debts). Student loan debt, while not impossible to discharge, is notoriously challenging.
Understanding these nuances beforehand will help you make an informed decision about whether to proceed with Chapter 7 or Chapter 13 bankruptcy or if you even qualify for either option. Here’s a breakdown of how they differ:
Comparing Chapter 7 Bankruptcy and Chapter 13 Bankruptcy
Chapter 7 bankruptcy is by far the most prevalent type. The process is typically quicker, easier, and more cost-effective, with qualifying debts often discharged within six months.
Commonly referred to as a liquidation bankruptcy, under Chapter 7, a court-appointed trustee assesses your assets to determine if any can be sold to pay your creditors. (What is classified as an asset can vary by state, but in most Chapter 7 cases, no assets are sold, resulting in a “no asset” case.)
To qualify for Chapter 7, you must successfully pass a “means test” based on your state’s median income.
If your income relative to your debt exceeds the allowable limit, you will be ineligible for Chapter 7. However, you still have an alternative: Chapter 13 bankruptcy. This option requires a long-term repayment plan, usually spanning three to five years, before some of your remaining debts are eliminated. Additionally, the filing process for Chapter 13 is considerably more complex than for Chapter 7.
Chapter 13 allows you to catch up on secured debts, such as mortgages or car loans, without losing your property and without the risk of liquidating any other assets as is the case with Chapter 7.
A Chapter 7 bankruptcy remains on your credit report for ten years, while a Chapter 13 bankruptcy is removed after seven years. Both types will have enduring effects on your credit score, and new debts incurred will likely carry higher interest rates.
4. Complete Your First Credit Counseling Course Prior to Filing
Before you can submit your bankruptcy forms, it is mandatory to complete a credit counseling course through an agency approved by the Department of Justice (with notable exceptions for filers in Alabama or North Carolina). This requirement applies regardless of which type of individual bankruptcy you choose to pursue.
The course can be taken online, in person, or via phone, with fees typically ranging from $15 to $50. You must complete this course within 180 days before filing for bankruptcy. Utilize the Department of Justice’s website to locate an approved program.
NOTE: Residents of Alabama or North Carolina must select and complete a course from a list of approved providers specific to those states.
5. Essential Steps for Filling Out Bankruptcy Forms
Regardless of the bankruptcy type you opt for, you will need to complete an extensive array of court documents.
Both Chapter 7 and Chapter 13 require you to fill out a bankruptcy petition and a statement of financial affairs, while some other forms may be optional. The U.S. Courts website (uscourts.gov) provides a comprehensive compilation of all the necessary bankruptcy forms.
In addition, your local court may require additional forms. Again, we highly advise seeking legal counsel. A bankruptcy attorney can help ensure you fully understand and accurately complete all these forms, thereby minimizing the risk of your case being rejected.
6. How to File Your Bankruptcy Forms with the Court
Once you have filled out all the required forms, you must file them with the bankruptcy court in your federal district. Typically, this task is handled by your attorney.
If you choose to file independently, be aware that there are approximately 90 different bankruptcy districts. Ensure that you are filing in the correct district based on your residence. If you have moved within the last 180 days, you should file in the district where you lived for the majority of that time period.
When filing, be prepared to pay a combination of filing and administrative fees totaling $300 or more. If you find this amount unmanageable, you may apply for a waiver of the filing fees.
7. What to Expect After Submitting Documents to Your Trustee
After you submit your bankruptcy forms to the court, a bankruptcy trustee will be appointed to your case.
The responsibilities of the trustee vary slightly depending on whether you filed for Chapter 7 or Chapter 13 bankruptcy. Generally, the trustee reviews the documents you filed with the court and may request further information to clarify what you provided.
Typically, your bankruptcy attorney will liaise with the trustee, but you may need to send documents directly to the trustee, such as pay stubs, tax returns, and bank account and credit card statements.
8. What to Expect During the Mandatory ‘341 Meeting’ of Creditors
The trustee assigned to your case will soon organize a required meeting with you, known as the “341 meeting.” This often daunting meeting derives its name from Section 341 of the U.S. Bankruptcy Code.
Your creditors will also be invited, although their attendance is not mandatory. During this meeting, you (and your spouse, if applicable) will be placed under oath and must respond to questions posed by the trustee and possibly by your creditors regarding your financial situation.
The meeting of creditors is frequently viewed as the most intimidating aspect of the bankruptcy process, as you will be asked specific questions about potentially sensitive areas of your financial life in a public setting. Failing to attend could result in the dismissal of your case.
The positive aspect is that creditors often do not show up, and these meetings usually last only 10 to 15 minutes.
9. How to Manage Nonexempt Property During Bankruptcy
Your handling of “nonexempt” property will depend on the chapter of bankruptcy you filed.
Overall, bankruptcy proceedings allow you to exempt — or protect — a significant amount of your real estate or personal property deemed necessary. However, these exemptions are not automatic, and you must provide a timely list of what qualifies for exemption. Exemptions may pertain to non-luxury primary vehicles, essential home goods, and home equity (although exemption rules can differ greatly by state).
Any property not listed as exempt is classified as nonexempt, and if you fail to provide a list, all your property is considered nonexempt and thus unprotected. Items such as luxury goods, additional vehicles, vacation homes, or expensive jewelry are often not eligible for exemptions.
In a Chapter 7 bankruptcy, your nonexempt assets may be sold by the trustee to repay your creditors.
In contrast, for Chapter 13 bankruptcy, trustees do not liquidate your nonexempt property but instead use its value when formulating your repayment plan. For instance, if you own a nonexempt sports car valued at $65,000, the trustee would not sell it to settle debts immediately. Instead, you would pay your creditors that value over the term of your repayment plan.
10. Why You Must Keep Making Payments on Secured Debts
A common misunderstanding surrounding bankruptcy is the belief that once you file, you can cease making payments on your debts.
While bankruptcy can eliminate many unsecured debts, such as outstanding credit card bills or personal loans, you must continue making monthly payments on secured debts if you wish to retain ownership of that property. Secured debt typically refers to loans associated with physical items, like a car loan. If you stop making payments, the lender has the right to repossess your property.
If you are facing foreclosure and have explored all other financial relief options, filing for Chapter 13 may postpone the foreclosure proceedings and assist in saving your home. However, you will still need a steady income to make future mortgage payments and catch up on any overdue payments throughout the repayment plan.
11. What Happens While You Wait for Eligibility Determination
Reaching this stage in the bankruptcy process does not guarantee that your debts will be automatically discharged.
Debts may not be discharged due to legal exceptions specific to your type of debt or if you provided incorrect, incomplete, or fraudulent information during the filing process.
Additionally, there is a timeframe in which the bankruptcy judge allows creditors and the case trustee the opportunity to challenge any discharges. If they do so, this initiates a lawsuit known as an “adversary proceeding.”
Furthermore, your case might be randomly audited by the Department of Justice. If this occurs, you may need to submit further information, which could delay debt relief by several weeks. If the audit uncovers inaccuracies, your case might be dismissed.
While these instances are relatively uncommon, reaching this point in the process indicates that many of your debts are likely eligible for discharge.
12. Complete the Debtor Counseling Course Before Discharge
Before your debts can be officially discharged, you are required to complete a debtor counseling course, similar to the course taken prior to filing.
This course must also be conducted by a provider approved by the Department of Justice (with the same exceptions for filers in North Carolina and Alabama).
Typically, you can find the debtor education course at a reduced cost compared to the initial course. For example, one approved provider offers the course online for $10 or less. Some providers even offer to file your completion certificate directly with your local court. Whether you opt for this service or file it yourself, ensure you complete this step as soon as possible to expedite the discharge process.
13. What to Expect While Waiting for Your Debt Discharge
The duration for your debts to be officially discharged varies based on the chapter of bankruptcy you filed.
For Chapter 7 bankruptcy, assuming all goes well, discharges are typically processed about four months after filing.
For Chapter 13, the timeline is considerably longer: debts are discharged only after you successfully complete your three- to five-year repayment plan. Missing payments during this timeframe can result in a judge dismissing your case, necessitating a restart of the entire process.
For instance, in 2024, approximately half of Chapter 13 cases that were closed ended with a discharge after consumers completed their repayment plans. Among cases that were dismissed, 51% cited missed payments as the primary reason.
Key Takeaways from Money’s Comprehensive Guide on Filing for Bankruptcy
- As a consumer, you primarily have two options for bankruptcy: Chapter 7 and Chapter 13. We highly recommend gathering all your financial documents and consulting an attorney to determine which option is best suited to your circumstances.
- Before you initiate the filing process, you must complete a credit counseling course and obtain a certificate of completion.
- Prepare and submit several bankruptcy forms to your local bankruptcy court district.
- You will be assigned a bankruptcy trustee and required to attend the “341 meeting” to discuss your financial situation under oath.
- Throughout the bankruptcy process, continue making payments on your secured debts if you wish to retain ownership of that property.
- Upon successful completion of your case, you must also complete a second course on debt counseling before your debts are discharged.
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