More Americans are turning to individual bankruptcy as debt pressures build. Chapter 7 filings, the most common form, are up 13% so far this year, according to Epiq, which tracks bankruptcy cases.
If you are falling behind on debt and thinking about bankruptcy, it is important to know that the process can damage your credit and restrict your ability to borrow for years. For some people, though, it is the reset they need.
Below is a plain-language overview of the main types of personal bankruptcy and the steps involved.
How the bankruptcy filing process works
Bankruptcy is a federal process, so the basic procedure is the same wherever you live. Still, local rules matter, especially when it comes to property exemptions.
This overview is not a substitute for legal advice. Think of it as a general guide to what filing requires.
1. Speak with a bankruptcy lawyer
You can file on your own, which is known as filing pro se, but it is usually wise to consult an experienced bankruptcy attorney first.
Studies show that legal help can greatly improve the chance of a favorable result, usually a bankruptcy discharge, which is a court order eliminating some or all qualifying debts.
According to the American Bankruptcy Institute, fewer than half of self-represented Chapter 7 filers receive a discharge. With an attorney, the success rate is close to 94%. The odds are even worse for people filing Chapter 13 on their own. The differences between the two chapters are explained below.
It is a good idea to talk with one or two lawyers near you who handle bankruptcy matters. You can start with these resources:
Your state or city bar association
Legal Services Corporation, a nonprofit legal aid provider for low-income Americans
Even if money is tight, you may be eligible for free help through one of those organizations or another local legal aid group.
Many lawyers also offer free consultations or email Q&A sessions. Take advantage of those offers. Nonprofit app Upsolve can also help people find free consultations, resources and legal help at no cost.
Ask attorneys whether bankruptcy makes sense for your situation and whether you are likely to qualify.
Before paying to file forms — and before leaving a mark on your credit report that can last up to 10 years — check for alternatives such as debt negotiation or nonprofit credit counseling. Many people who ultimately file bankruptcy explore those options first.
2. Gather your financial records
Once you have decided bankruptcy is the right path, and ideally confirmed that with an attorney, the paperwork begins.
Before completing the official forms, organize your own financial documents.
When you file, you are telling a federal court that you cannot repay your debts and need help. Later, you will have to prove that by fully disclosing your finances.
You will generally need the following:
Identification documents such as a driver’s license and Social Security card
Tax returns, usually for up to the past four years
Proof of income, including pay stubs, W-2s, self-employment income, investment income and government benefits
Bank statements and/or retirement account statements
Proof of asset values, such as vehicle and real estate valuations, plus related documents like loan balances, insurance records and monthly payment amounts
A list of creditors and the amounts owed
A detailed monthly budget of living expenses
Getting these materials together early is important. It can help you decide which chapter to file under, and the bankruptcy trustee may later ask for some or all of these records, along with additional documents.
3. Review your debts and choose a path
Once your paperwork is organized, the next step is to understand exactly what debts you are trying to address.
Some obligations, including child support, alimony and certain tax debts, cannot be discharged. Bankruptcy also cannot stop wage garnishment tied to those debts. Student loans are harder to discharge, though not impossible in some cases.
That background helps determine whether Chapter 7 or Chapter 13 is the better fit, or whether you qualify at all. The two options work differently:
Chapter 7 versus Chapter 13
Chapter 7 is the most common form of bankruptcy by a wide margin. It is generally faster, simpler and less expensive. In some cases, qualifying debts can be discharged in about six months.
Also called liquidation bankruptcy, Chapter 7 allows a court trustee to decide whether you have assets that could be sold to pay creditors. What counts as an asset depends on state law, but most Chapter 7 cases are “no asset” cases, meaning no property is sold.
To qualify, you must pass a means test based on your state’s median income.
If your income is too high relative to your debts, Chapter 7 may not be available. Chapter 13 is the alternative. It takes longer because it requires a repayment plan, usually lasting three to five years, before any remaining qualifying debts are discharged. The process is also more complicated than Chapter 7.
This chapter can help you catch up on secured debts such as mortgages or car loans without losing property and without the liquidation risk that comes with Chapter 7.
Chapter 7 remains on a credit report for 10 years, while Chapter 13 drops off after seven. Either way, your credit will be affected for a long time, and new borrowing will likely come with higher interest rates.
4. Complete the first credit counseling course
Before filing, you must complete a required course from a credit counseling agency approved by the Department of Justice, except in Alabama or North Carolina. This applies no matter which chapter you choose.
You can take the course online, in person or by phone. It usually costs between $15 and $50. The certificate must be obtained within 180 days before filing. The Department of Justice website lists approved providers.
5. Fill out the bankruptcy forms
Whatever chapter you file under, expect a long set of court forms.
Both Chapter 7 and Chapter 13 require a bankruptcy petition and a statement of financial affairs, while some other forms are optional. The U.S. Courts website compiles the federal forms you will need.
Local court forms may also be required. This is another reason legal help is valuable: a bankruptcy lawyer can explain the forms and help reduce the risk of rejection.
6. Submit the forms to court
After completing the paperwork, you must file it with the bankruptcy court in your federal district. If you have a lawyer, that person will usually handle the filing.
If you are filing on your own, make sure you use the correct bankruptcy district. There are about 90 of them. If you moved within the previous 180 days, you generally file in the district where you lived for most of that period.
Filing fees are $338 for Chapter 7 and $313 for Chapter 13. If you cannot afford them, you can request a fee waiver. Credit counseling and debtor education may also come with local fees, typically ranging from $20 to $100.
7. Send documents to the trustee
Once the court receives your filing, a bankruptcy trustee is assigned to your case.
The trustee’s role differs somewhat between Chapter 7 and Chapter 13, but in general the trustee reviews your filings and may ask for more information to verify what you submitted.
Your lawyer usually handles much of this communication, but you may still have to provide documents such as pay stubs, tax returns and bank or credit card statements.
8. Attend the creditors’ meeting, also called the 341 meeting
The newly assigned trustee will schedule a mandatory meeting known as the 341 meeting, named for a section of the U.S. Bankruptcy Code.
Your creditors may be invited, though they do not have to attend. At the meeting, you — and your spouse, if you filed jointly — will be sworn in and questioned by the trustee, and possibly by creditors, about your finances.
Many people find this to be the most intimidating part of bankruptcy because it involves direct questions about personal financial matters in a public setting. Missing the meeting could lead to dismissal of the case.
The good news is that creditors often do not appear, and the meeting typically lasts only 10 to 15 minutes.
9. Deal with nonexempt property
The treatment of nonexempt property depends on the chapter you file.
Bankruptcy law allows you to exempt, or protect, certain necessary property such as a primary vehicle, basic household items and some home equity, though exemption rules vary widely by state. These protections are not automatic, and you must list the items that qualify.
Any property outside those exemptions is considered nonexempt and unprotected. If you do not list exemptions, everything may be treated as nonexempt. Items that often are not protected include luxury goods such as boats, extra cars, vacation homes and jewelry.
In Chapter 7, the trustee may sell nonexempt assets to pay creditors.
In Chapter 13, the trustee does not sell those assets, but their value is used when building your repayment plan. For example, if you owned a nonexempt sports car worth $65,000, it would not be sold immediately. Instead, that value would be accounted for in the plan and paid out over time.
10. Keep paying secured debts
A common misunderstanding is that filing bankruptcy means you can stop paying all debts.
Bankruptcy can eliminate many unsecured debts, such as overdue credit card balances or personal loans, but you usually need to keep paying secured debts if you want to keep the property connected to them. A secured debt is typically tied to a physical item, like a car loan. If payments stop, the lender can repossess the property.
If foreclosure is a concern and you have already tried other forms of relief, Chapter 13 may help delay foreclosure and give you a chance to keep your home. You will still need income to continue future mortgage payments and to catch up on missed amounts through the repayment plan.
11. Wait for the court to decide whether you qualify for discharge
Even after making it through most of the process, your debts are not automatically wiped out.
A discharge may be denied if the debt is not legally eligible, or if you provided false, incomplete or fraudulent information under oath or in your filing.
Creditors and the trustee also get a period to object to a discharge. If that happens, it can lead to an “adversary proceeding,” which is a lawsuit within the bankruptcy case.
There is also a chance that the Department of Justice will randomly audit the case. If that happens, you may need to provide more information, which can delay relief by several weeks. If the audit reveals problems, the case could be dismissed.
Still, reaching this stage is a good sign that at least some of your debts may qualify for discharge.
12. Finish the debtor education course
Before debts can be officially discharged, you must complete a second required course, known as debtor education.
This course must also be provided by an approved Department of Justice provider, with the same exceptions for filers in Alabama and North Carolina.
The debtor education class is often cheaper than the first course. Some approved providers offer it online for $10 or less. A few will file the completion certificate for you, but whether you do that yourself or use the provider’s service, it is best to finish this step as quickly as possible.
13. Wait for discharge
How long it takes for a discharge depends on the chapter you filed.
For Chapter 7, discharges are typically decided about four months after filing if everything goes smoothly.
For Chapter 13, discharge does not come until you complete the full three- to five-year repayment plan. Missing payments during that period can lead a judge to dismiss the case, forcing you to start over.
Federal court data show that in one recent year, about half of closed Chapter 13 cases ended in a discharge after the consumer successfully completed the repayment plan. Among dismissed cases, 51% cited missed payments.
Key takeaways from this bankruptcy guide
Consumers generally have two main bankruptcy options: Chapter 7 and Chapter 13. It is smart to gather your financial records and speak with an attorney before deciding which one fits your situation.
Before filing, you must complete a credit counseling course and receive a completion certificate.
You will need to complete multiple bankruptcy forms and file them with the correct local bankruptcy court.
You will be assigned a trustee and must attend the 341 meeting to answer questions about your finances under oath.
If you want to keep secured property, you generally need to continue making those monthly payments during the process.
If your case is successful, you must also complete a second debtor education course before any debts are discharged.
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