If you are saddled with crushing debt that you have little hope of paying back, personal bankruptcy may be an option worth considering.
There are three main types of bankruptcy, usually referred to by their chapter in the bankruptcy code. Two are best for individuals — Chapter 13 and Chapter 7 (Chapter 11 bankruptcy is mainly for businesses). Chapter 13 bankruptcy involves restructuring your debts so you can pay them back over a three-to-five year period.
When you file for Chapter 7 bankruptcy, you agree to sell almost all your assets and use the proceeds to eliminate your debts.
Each state is different in what property you are allowed to keep in the Chapter 7 bankruptcy process. You typically aren’t required to liquidate your home, car, clothing, and personal items, such as photos, books or even furniture.
Some debts are excluded. You won’t be able to erase debt for taxes, child support, student loans and liens.
Not everyone is eligible for Chapter 7 bankruptcy. A “means test” considers your location, your income and your debts to see if this type of bankruptcy makes sense for your situation. If your income is too high, you might not qualify. This means test varies by each state, and calculators for the test can be found online or through an attorney’s office.
Once you know if you qualify, you file a petition with a bankruptcy court. This petition includes financial statements for all your debts, assets and possessions.
Once the paperwork is filed, creditors can no longer continue with their collection efforts. A trustee will be appointed and your creditors will be notified of your bankruptcy process.
The Chapter 7 bankruptcy process includes answering questions under oath about your assets and debts. The trustee then sells your assets. Any administrative expenses are paid and the trustee takes the remaining amount and pays it to creditors in order of priority.
The process typically takes four to six months after the case is filed in court. You’re required to take a financial counseling course before the bankruptcy process is concluded.
While Chapter 7 bankruptcy eliminates your debts, it also affects your credit score. This can result in lenders lowering your credit limits and charging higher interest rates. The bankruptcy stays on your credit report up to 10 years. You can, however, work at improving your credit score once the bankruptcy is finalized.
The entire process can cost up to $1,500 for bankruptcy fees, plus a court fee of about $300. If your specific bankruptcy case involves alimony, contested debt or child support, the cost may be higher.
A lawyer specializing in bankruptcy can help determine whether Chapter 7 bankruptcy is the best option for your financial situation.