Thinking About Bankruptcy? Here’s What You Need to Know
Having more debt than you feel like you can handle can be discouraging and stressful. Being pressured about money is a pain I know all too well. From the time I was a college student until after I became a mother, I spent years fighting to fix my debt problems.
Thankfully, I was eventually able to dig myself out of the financial hole. It took a new financial philosophy and years of hard work, but I can now say that I’m 100% debt-free.
I wholeheartedly believe that anyone can turn their financial situation around. But your story might be different than mine, and that’s okay. Some debt problems are so big that it takes drastic measures to change the situation.
- Read: My Financial Philosophy
Do you feel like you’ve done everything you can to fix your debt problem — like drastic spending cuts, finding ways to earn extra money, and more? If so, there’s a chance that filing bankruptcy might give you the fresh start you desperately need.
What Is Bankruptcy?
Bankruptcy is a federal court proceeding. It can help people who are in desperate financial situations find total or partial freedom from overwhelming debt.
When you file bankruptcy, you explain to a judge that you can’t afford to pay the debts you owe. The judge, along with a court trustee, will review your claim by comparing your assets and liabilities. This financial information helps the court determine whether to discharge your debts in full, restructure your debt, or deny your request.
If you qualify to file bankruptcy, you usually can’t include debts such as:
- Federal Student Loans
- Income Taxes
- Child Support and Alimony
- Debts You Didn’t List
- Large Credit Card Charges or Expensive Purchases Made Right Before Filing Bankruptcy
The Cost of Filing
Because bankruptcy is a legal process, most people hire a lawyer to help them navigate it. Technically, you can file for bankruptcy on your own. But bankruptcy is complicated. If you try to manage things by yourself, you could do something wrong.
However you file bankruptcy, there will be costs involved. Here’s a look at some of the most common fees you may have to pay:
- Bankruptcy Filing Fee — $335
- Credit Counseling Fee — $50 Average Debtor Education Course — $50 to $100 Average
- Attorney Fees (Chapter 7) — $500 to $3,500 Average (Upfront)
- Attorney Fees (Chapter 13) — $2,500 to $6,000 Average (Part Upfront, Part Included in Repayment Plan)
Chapter 7 vs. Chapter 13 Bankruptcy
Bankruptcy may stop collection efforts, foreclosures, property repossessions, and even wage garnishments. But you’ll need to decide which type of bankruptcy is right for you (and have the court agree).
- Chapter 7 Bankruptcy: Chapter 7 is known as liquidation bankruptcy. It wipes out eligible debts, generally within around 90 days. You’ll have to pass a “means test” to file this type of bankruptcy, meaning your disposable income must be very limited.
With a Chapter 7, you may need to sell certain assets and give the money from such sales to your creditors. While you may be able to keep some assets, like your vehicle, the court might not let you hang on to other cash or property. - Chapter 13 Bankruptcy: If you have property that you don’t want to sell, like a house, you may want to consider Chapter 13 bankruptcy. It may also be a good fit if your disposable income is too high to qualify for a liquidation bankruptcy.
With a Chapter 13 bankruptcy, your debt isn’t wiped out. Instead, it may be reduced and spread out over a three- to five-year repayment plan. When the repayment plan ends, any remaining unpaid debt is discharged.
How Bankruptcy Impacts Your Credit
Probably the biggest downside to filing bankruptcy is the impact it can have on your credit. A Chapter 7 bankruptcy is allowed to stay on your credit report for up to 10 years from the date filed. Chapter 13 bankruptcy can remain on your credit report for up to seven years from the date of discharge or ten years from the date filed — whichever comes first.
When a bankruptcy appears on your credit reports, it may damage your credit scores. But if your credit scores were already low because of late payments, past-due balances, or other negative information, adding a bankruptcy to your credit report might not make your scores much worse than they already were.
Having a bankruptcy on your credit report can make it hard to borrow money again in the future. But that doesn’t mean you’ll never be able to qualify for another credit card or loan. You can (and should) take steps to repair your credit after bankruptcy.
Your Bankruptcy Doesn’t Protect Co-Signers
Did you ask a loved one to co-sign on a personal loan, credit card, or auto loan to help you qualify? If you did, you’re both legally liable for the debt. Filing bankruptcy might get you off the hook financially, but the creditor can still come after the person who co-signed with you.
As a result, your friend or family member’s credit may be damaged if you don’t keep up with the payments on a joint account. The creditor might decide to sue your co-signer to collect the unpaid balance on your loan or credit card. The only way for your co-signer to avoid such problems would be to take over the payments or file for bankruptcy protection herself.
What’s Next?
Bankruptcy isn’t the right move for everyone. While it might give you a fresh start financially, bankruptcy comes with some significant consequences. Consider the pros and cons carefully before you make your choice.
If you decide to file bankruptcy, begin working right away to rebuild your credit. Smart action steps you can take include monitoring your credit reports, establishing new accounts (like secured credit cards), and paying current bills on time. You should also make a point to start using a budget (or refresh your old one) to avoid new debt and protect your credit scores.
Resources to help you:
- Budget By Paycheck Workbook
- Compare Secured Credit Cards
- Credit Karma (Free weekly credit reports and scores from TransUnion and Equifax)
- Credit Sesame (Free monthly TransUnion credit report and score)
