What is Bankruptcy? A Quick Guide for Consumers Bankruptcy is a legal process designed to help individuals who can't pay their debts get a fresh start. For most individuals and families, there are 2 types to consider. Here’s what you need to know: Types of Bankruptcy Chapter 7 Bankruptcy (Liquidation) For: Individuals and businesses. How it works: No payments are made. Instead, a trustee reviews your assets to determine if there are any items of value that are not exempt. That property can be sold with the proceeds to pay the creditors. Most of your unsecured debts (like credit card debt and medical bills) are discharged (wiped out). Remember: In the vast majority of cases, no property is actually sold. Your bankruptcy attorney will review your assets ahead of time to make sure you are protected. Chapter 13 Bankruptcy (Reorganization) For: Individuals with a regular income. How it works: You keep your property and set up a 3- to 5-year repayment plan to pay back all or part of your debts. Eligibility: You need to have a steady income and your debts must be within certain limits. Why file: Chapter 13s are great for stopping foreclosures and car repossessions, allowing you to rewrite the terms of your loan and catch up over time. These cases are for protecting your property from being taken. Key Points Fresh Start: Bankruptcy helps you reset your financial situation. Legal Protection: Once you file, creditors must stop trying to collect what you owe them. How to Start Consult a Bankruptcy Attorney: They can help you understand your options and guide you through the process. Gather Financial Information: You'll need to provide details about your debts, income, and assets. File a Petition: Your attorney will help you file the necessary paperwork with the bankruptcy court.
Bankruptcy is a legal process for those unable to pay their debts. There are two main types for individuals: Chapter 7 (Liquidation): A trustee reviews and sells non-exempt assets to pay creditors. Most unsecured debts, like credit cards and medical debt, are discharged (wiped out). Typically, no property is sold as exemptions protect most assets. Chapter 13 (Reorganization): Individuals with regular income create a 3- to 5-year repayment plan to keep property and pay some of your debts. It’s ideal for stopping foreclosures and repossessions. At the end of the repayment plan, any remaining unpaid debts are discharged. Bankruptcy provides a fresh start and legal protection from creditors. Consult a bankruptcy attorney to begin.
Filing bankruptcy is the same as declaring bankruptcy. When you file bankruptcy, the automatic stay goes into effect immediately, stopping all collection activities like phone calls, garnishments, repossessions, and foreclosures. Creditors can't even send you mail anymore! Within a month or so, a trustee will review your case with you and your attorney. Chapter 7: If no assets are found, the case typically closes 2 to 3 months later, and your debts will be discharged (wiped out). Chapter 13: Your case will proceed to confirmation, where you and your attorney seek court approval. Once granted, you make monthly payments until completing your plan at which point your remaining debts will be discharged.
Declaring bankruptcy is the same as filing bankruptcy. When you declare bankruptcy, the automatic stay goes into effect immediately, stopping all collection activities like phone calls, garnishments, repossessions, and foreclosures. Creditors can't even send you mail anymore! Within a month or so, a trustee will review your case with you and your attorney. Chapter 7: If no assets are found, the case typically closes 2 to 3 months later, and your debts will be discharged (wiped out). Chapter 13: Your case will proceed to confirmation, where you and your attorney seek court approval. Once granted, you make monthly payments until completing your plan at which point your remaining debts will be discharged.
The length of time after bankruptcy before you can get a mortgage varies depending on the type of bankruptcy filed and the type of mortgage you seek: Chapter 7 Bankruptcy: FHA Loans: Typically, you can apply for a mortgage 2 years after the discharge date. VA Loans: Generally, a 2-year waiting period after discharge. Chapter 13 Bankruptcy: FHA Loans: You can apply after 1 year of on-time payments with court approval or 2 years after discharge. VA Loans: Typically, 1 year of on-time payments with court approval or 2 years after discharge. Conventional Loans: Generally, a waiting period of 2 years after discharge. Lenders may also consider your credit score, income stability, and down payment. It's important to rebuild your credit and maintain good financial habits during the waiting period.
Bankruptcy fraud is a general term that involves deceiving the Bankruptcy Court to exploit the bankruptcy system or defraud creditors. Common forms of bankruptcy fraud include: Concealing Assets: Hiding property or assets to avoid them being sold to pay creditors. False Information: Providing inaccurate or incomplete information on bankruptcy forms. Bribery: Offering money or favors to the trustee or court officials to influence the bankruptcy process. It is vital to be truthful with your attorney and on your bankruptcy documents. Bankruptcy fraud can be criminal and punishable by fines, imprisonment, or both.
If you are overwhelmed by debt, the first step is to call a bankruptcy attorney. They should be willing to consult with you free of charge to determine whether filing is the best course of action. Once you decide to file, gather information on your income, assets, and debts. Typically, you'll need to provide: The last six months of pay stubs and bank statements. The last 2 to 4 years of tax returns. If you can't locate your returns, you can easily get them from the IRS. You will then sit with your attorney and answer a series of questions regarding your property and any financial dealings you've had over the last few years. The whole process is actually fairly simple with a competent lawyer.
When you file bankruptcy, the automatic stay goes into effect immediately, stopping all collection activities like phone calls, garnishments, repossessions, and foreclosures. Creditors can't even send you mail anymore! Within a month or so, a trustee will review your case with you and your attorney. Chapter 7: If no assets are found, the case typically closes 2 to 3 months later, and your debts will be discharged (wiped out). Chapter 13: Your case will proceed to confirmation, where you and your attorney seek court approval. Once granted, you make monthly payments until completing your plan at which point your remaining debts will be discharged.
Court Filing Fees: Chapter 7: $338 Chapter 13: $313 Attorney Fees: There isn't a fixed cost for attorney fees as it varies by the complexity of the case and the specific circumstances, such as secured debt, real estate, small businesses, or difficult creditors. Broad Guidelines: Chapter 13: Fees are often regulated by the courts. For example, in Chicago, most Chapter 13 bankruptcies cost approximately $4,500. Chapter 7: These tend to involve less work and generally cost less, typically ranging from $1,000 to $3,000. Upfront Costs: Attorneys vary widely on how much money clients need to pay upfront. At DebtStoppers, we work very hard to keep this number as low as possible. Often, we charge zero upfront to eliminate barriers for people who need help now. Beware of law firms that claim a one-size-fits-all price, as costs should reflect the unique aspects of your case.
Filing bankruptcy is the same as declaring bankruptcy. When you file bankruptcy, the automatic stay goes into effect immediately, stopping all collection activities like phone calls, garnishments, repossessions, and foreclosures. Creditors can't even send you mail anymore! Within a month or so, a trustee will review your case with you and your attorney. Chapter 7: If no assets are found, the case typically closes 2 to 3 months later, and your debts will be discharged (wiped out). Chapter 13: Your case will proceed to confirmation, where you and your attorney seek court approval. Once granted, you make monthly payments until completing your plan at which point your remaining debts will be discharged.
The most obvious downside is the effect on your credit report. However, the impact varies depending on your current credit score: High Credit Score: If you have a high credit score, filing for bankruptcy can significantly drop your score by 100 to 200 points. Low Credit Score: If your credit is already low (in the 500s or 400s), filing isn't likely to have a significant impact. Recovery Over Time Improvement: Over time, your credit score should improve as you move further away from the filing date. Discharge: Once discharged, your score can improve fairly rapidly if you take steps to rebuild your credit. This includes taking out new revolving credit, never using more than 30% of the limit, and paying the entire amount off at the end of each month. While bankruptcy does affect your credit, responsible financial behavior post-filing can help you recover and rebuild your credit score.
There's no limit to how many times you can file for bankruptcy, but you can only have one case pending at a time. There are limits to how often you can receive a discharge: Chapter 7 Bankruptcy: If you received a Chapter 7 discharge, you are not eligible to receive another Chapter 7 discharge for 8 years from your filing date. You are eligible to receive a Chapter 13 discharge 4 years after filing for Chapter 7. Chapter 13 Bankruptcy: If you received a Chapter 13 discharge, you are not eligible for another Chapter 13 discharge for at least 2 years. You are not eligible for a Chapter 7 discharge for at least 6 years, unless you paid more than 70% of your unsecured debt in the first Chapter 13 case.
The impact of filing bankruptcy on your house depends on your specific circumstances and the type of bankruptcy you file. Chapter 13 Bankruptcy Current Mortgage: If you are current with your mortgage payments, nothing happens to your house; you simply continue making payments. Behind on Mortgage or Taxes: Chapter 13 will stop any foreclosure proceedings and give you time to pay back the arrears without additional interest or penalties. Underwater House: If your house is underwater (owing more on the mortgage than the house's value) and you have a second mortgage, Chapter 13 can help eliminate the second mortgage. Chapter 7 Bankruptcy Non-Exempt Equity: Chapter 7 will affect your mortgage only if there is non-exempt equity in the home. Equity is the value of the house after paying off all mortgages and taxes. Exemption Amount: The exemption is the value the homeowner gets to keep before a trustee can sell the property. This amount varies by state. For example: Illinois: $15,000 per spouse. Texas and Florida: 100% of the value of the home is exempt. It's crucial to consult with a bankruptcy attorney to understand how filing might affect your specific situation and to determine the best course of action for your home.
If you are overwhelmed by debt, the first step is to call a bankruptcy attorney. They should be willing to consult with you free of charge to determine whether filing is the best course of action. Once you decide to file, gather information on your income, assets, and debts. Typically, you'll need to provide: The last six months of pay stubs and bank statements. The last 2 to 4 years of tax returns. If you can't locate your returns, you can easily get them from the IRS. You will then sit with your attorney and answer a series of questions regarding your property and any financial dealings you've had over the last few years. The whole process is actually fairly simple with a competent lawyer.
Chapter 7 Bankruptcy is the most common form of bankruptcy. It's ideal for those who cannot afford to repay their debts and are seeking a quick fresh start. If you're overwhelmed by debt, don't have a lot of valuable property, and don't need to stop a foreclosure or repossession, Chapter 7 is likely the right choice for you. Chapter 7 Bankruptcy For: Individuals and businesses. How it works: No payments are made. Instead, a trustee reviews your assets to determine if there are any items of value that are not exempt. That property can be sold with the proceeds to pay the creditors. Most of your unsecured debts (like credit card debt and medical bills) are discharged (wiped out). Remember: In the vast majority of cases, no property is actually sold. Your bankruptcy attorney will review your assets ahead of time to make sure you are protected.
In most cases, there are no assets or objections by creditors. When this happens, the case will end 90 days after meeting with the Trustee for the 341 Meeting. This meeting typically occurs 4 to 6 weeks after filing, so cases are usually over within 4.5 months of filing. If there are assets that the trustee will sell, the case will stay open longer as the trustee administers the case. This can be fairly quick if the asset is a simple bank account, or it can take years if the asset is a lawsuit or business to wrap up. In these cases, the debtor will still be discharged within 4 to 5 months, but the case will remain open as the trustee liquidates assets and distributes them to the creditors.
Chapter 13 Bankruptcy is designed for individuals with regular income who have encountered financial difficulties but can repay some or all of their debt if the terms are adjusted. This option is typically for homeowners or car owners who have fallen behind and want to save their property from being foreclosed or repossessed. For: Individuals with a regular income. How it works: You keep your property and set up a 3- to 5-year repayment plan to pay back all or part of your debts. Eligibility: You need to have a steady income, and your debts must be within certain limits. Why file: Chapter 13 is effective for stopping foreclosures and car repossessions, allowing you to rewrite the terms of your loan and catch up over time. It's ideal for protecting your property from being taken while eliminating as much other debt as possible.