Declaring bankruptcy is not an easy choice to make, and it can be extremely overwhelming.
In most cases, individuals or businesses file for bankruptcy protection because of financial strains, overwhelming debt, or to protect their assets from creditors, lawsuits, foreclosures, and repossessions.
But it’s not a simple process. It’s not as easy as filing some paperwork and washing your hands of your debt. It’s a process that can take several months to complete and will cost you money — which is ironic since you’re trying to get out of debt.
Attorney fees, filing fees, and the fees paid to the trustee as part of the process can run into several thousand dollars when taken together. (The trustee is someone appointed by the federal government to serve as a representative of the debtor’s estate. They’re not government employees, but they work in tandem with the government to ensure the integrity of the system is maintained.  They can’t act without court approval, as the bankruptcy judge has ultimate jurisdiction.) 
While bankruptcy can eliminate most of your debt, you should consider the pros and cons of filing for bankruptcy before deciding to do so.
Filing for bankruptcy can give you immediate relief from debt and creditors and can put an end to those annoying calls from debt collectors. It can also stop lawsuits and wage garnishment, and even allow you to keep certain assets while giving you an opportunity to start over with a clean slate.
An automatic stay gives you immediate relief from creditors: You don’t have to wait until your bankruptcy case is resolved.
Section 362 of the U.S. Bankruptcy Code stipulates that an automatic stay takes effect at the time you file for protection and remains in effect until court proceedings are concluded. This means no more phone calls from debt collectors. And you won’t be subject to lawsuits, wage garnishments, home mortgage foreclosures or repossessions while the stay is in place.
If lenders or collection agencies violate the stay, you can sue them. However, they can also appeal to have the stay lifted if the assets in question are likely to lose significant value by the time the proceedings are complete.
Bankruptcy provides immediate relief from debt collectors and dischargeable debt such as credit card debt, medical bills, personal loans and past due utility bills.
You may be able to keep some of your assets, such as your car, home, clothes, household appliances, and the like. But what you may get to keep depends in part on whether you file Chapter 7 or Chapter 13 bankruptcy (see more below).
Bankruptcy can give you a fresh start in life and a baseline to start rebuilding your credit. When you’re unable to pay your debts or to pay them on time, each delinquent payment negatively affects your credit score. After declaring bankruptcy, with these debts no longer in play, you’ll stop incurring these negative marks on your credit.
Bankruptcy will negatively impact your credit score in a big way, at least initially. How much depends in part on how high your score is to begin with: Someone with a high credit score can expect to see a precipitous drop after filing for bankruptcy, but someone who already has a lot of negative marks on their credit report might see only a modest decline. Therefore, people who file for bankruptcy only after they’ve started to miss monthly payments repeatedly won’t be affected as severely.
In addition, any drop in your credit score will lessen over time as you begin rebuilding your credit by keeping up with new payments, maintaining a manageable (and low) credit utilization ratio, and opening only the few credit accounts you really need.
If you do these things, you can improve your credit score within two or three years, even though a bankruptcy will stay on your credit report for seven to 10 years.
Bankruptcy isn’t a cure-all. It won’t relieve you of all your debts, because some forms of debt aren’t covered by bankruptcy law.
Most prominent among debts that constitute exemptions from bankruptcy protection are legal obligations. So, if you owe tax debt, you’ll continue to owe it, and the same is true for alimony (spousal support) and child support. You’ll also have to keep making payments on your student loan debt in most circumstances.
You can only have a federal student loan wiped away in bankruptcy if you can prove in a separate action — known as an “adversary proceeding” — that repaying it would create an undue hardship for you and your dependents and that you made good-faith attempts to repay before filing for bankruptcy.
Private student loans may, however, be subject to bankruptcy. A New York-based federal appellate panel issued a 21-page ruling in June 2021 that suggested private student loans can indeed be discharged in bankruptcy.
While you often can’t get a federal student loan discharged in bankruptcy, you may qualify for a federal income-based repayment plan, which can reduce your monthly payment and free up money to help pay off higher interest debts.
There are tax implications once the debt is forgiven after 25 years of income-based payments, and if your income increases, your payment will likely increase. A handy loan simulator on StudentAid.gov can help you determine if you qualify for an income-based repayment plan and which one is right for you if you wish to pursue that option.
Bankruptcy can cause you to lose all credit cards and forfeit real estate, and can severely hurt your credit score. You may be able to apply for new credit cards after you go through bankruptcy, and you might even start getting offers in the mail.
However, it’s important to be selective about which (if any) you choose since most will come with exceptionally high-interest rates, if you can get approved.
Chapter 7 bankruptcy can remain on your credit report for seven years and in some cases as long as 10 years. Its impact on your score will be significant at first, especially if you start with a relatively high credit score, but will lessen over time and can be increasingly offset as you build credit by making payments on time and taking other steps to improve your standing.
It will likely become more difficult to obtain loans with a bankruptcy on your credit report, and when you are approved for loans, you’re likely to receive only high-interest offers for credit cards, car loans and other loans.
You may also have trouble getting cosigners to help you obtain loans, especially if they cosigned previous loans that were discharged in bankruptcy. This is because any negative items, such as missed debt payments and bankruptcies, don’t just affect you: They affect your cosigner’s credit, too.
And it may not just be their credit that suffers; it might be your relationship with them. So it’s important to think long and hard before asking a friend or relative to sign on with you — and to expect they might say no this time.
It may seem counterintuitive, and frustrating, but it costs money to file bankruptcy. So, even though you’re trying to get out of debt, you’ll have to pay in order to do so.
The biggest outlay you’ll probably have to make is hiring a bankruptcy lawyer. Attorney’s fees averaged $1,450 for a Chapter 7 filing and more than twice that — $3,000 — for a Chapter 13 filing, according to a 2016 study.
Other costs include filing fees, which can run a little over $300, and credit counseling, which can cost about $50. The trustee gets paid, too, but you don’t have to make any extra payments. There’s a small administration fee of $60 that comes out of your filing fees, and then the trustee also gets a percentage of the assets sold to cover your debt in a Chapter 7 case.
Once you file for bankruptcy, it’s permanent. It goes on your credit report, and it can’t be undone. It also doesn’t address the root cause of your financial situation. If you’ve still got poor budgeting or undisciplined spending habits, or if you’re still not making enough money to cover your costs, bankruptcy won’t solve those problems.
The process itself involves paying a filing fee and filling out at least 23 different forms, including the petition and any forms required locally, pay stubs, and a fee waiver application if you need one, along with a credit counseling certificate. 
And yes, credit counseling is part of the process, whether you’re filing for Chapter 7 or Chapter 13. It must be completed in the six months prior to the filing, and the counselor you choose must be approved by the Justice Department. Courses are relatively simple, lasting no less than an hour, and cost between $10 and $50.
It’s the first of two courses you’ll need to take. The second, a debtor education course, costs about the same amount and takes at least two hours, again either by phone or online. It must be taken from an approved credit counseling agency and is meant to educate debtors so they’re prepared to avoid future financial pitfalls.
Before that, you’ll have to mail your documents to the trustee, who’ll set up a meeting of creditors about a month after you file. Creditors rarely actually show up at these meetings, at which the trustee asks the debtor a number of questions, mostly aimed at affirming the truth of what’s been filed in the paperwork.
Creditors usually don’t attend, but on occasion, one may send an attorney to ask his own questions and may end up raising an objection in writing if your answers aren’t satisfactory. Then those issues will be decided before the bankruptcy judge. 
There are two types of personal bankruptcy — Chapter 7 and Chapter 13 — both of which must be addressed in federal bankruptcy court.
Under Chapter 7 bankruptcy, a court-appointed trustee may sell all but a few of your assets and turn the proceeds, or the assets themselves, over to creditors. There are just a few exceptions, such as cars, things you need for work, and basic furnishings for your household. You can only file for Chapter 7 bankruptcy every eight years.
Chapter 7 bankruptcy is also known as “straight bankruptcy” or “liquidation bankruptcy.” Under this kind of plan, you don’t have to repay any of your debts; the sale of your assets serves that purpose. It can take 3-4 months to discharge a case and clear you of your debts under this process, and once it’s done, you don’t owe any more money.
This can be a good option for people who aren’t homeowners and have limited income. In fact, there’s an income means test to qualify for filing this kind of bankruptcy. You will also need to take part in a “creditor meeting,” arranged by the trustee, in which you meet with creditors affected by your filing and answer questions at the courthouse.
The rules are a little different for Chapter 13 bankruptcy, also known as “reorganization bankruptcy.”
If you’ve got a steady income, you can keep property that might otherwise be at risk, such as a car or mortgaged house. But instead of ordering that your assets be sold to pay creditors, the court will approve a repayment process called a “wage earner’s plan” that allows your future income to be used to pay your debts over a period of 3-5 years.
In order to qualify for Chapter 13, you can’t have more than a certain amount of debt. That limit stood at $419,275 of unsecured debt (such as credit card debt) and $1,257,850 of secured debt (such as a mortgage or car loan) as of 2021.
If you are approved for Chapter 13 bankruptcy but fail to abide by your repayment plan, the bankruptcy doesn’t disappear from your credit history. On the contrary, it will stay on your credit report for seven to 10 years, just as it would if you had completed the terms of your bankruptcy.
Is bankruptcy the best option for you? The answer to that question depends on your situation and a variety of factors such as medical bills, collection accounts, foreclosures and liens. It is best to speak to a bankruptcy attorney.
One alternative to bankruptcy is asking for a debt settlement. It’s a process that involves appealing to creditors for a chance to resolve your debt in exchange for making a lower payment.
To do so, you should write a debt settlement letter that includes why you can’t pay off the debt in full, what amount you’re offering instead, and what you expect from the creditors if they accept. It’s a good idea to have saved up the money for your proposed settlement before you send the letter.
Credit counseling can be an alternative to bankruptcy. Credit counselors can proactively help you make better financial decisions and manage your money more effectively. They can also help you decide whether bankruptcy is the right choice given your financial situation and how it might affect your finances and your credit. If you do decide to declare bankruptcy, credit counselors can help you develop better financial habits so you don’t wind up back in the same place again.
They offer a range of services including debt management plans, credit report reviews, foreclosure prevention, and tips on small-business financing.
If you’ve considered filing for bankruptcy, reducing lifestyle expenses may not be enough to keep you from doing so. However, it is worth evaluating where you can cut costs and if there are opportunities to increase your income.
Creating a streamlined budget that dispenses with luxuries is one step you can take. Examine automatically renewing subscriptions and cancel them. Do you really need that streaming service? Do you need to go out to dinner or get fast food so often? Can you manage car expenses by driving less?
If you have assets, like a home or car, you can consider selling them to raise cash or remove debt obligations such as an auto loan or mortgage. Refinancing is another option. However, if you have bad credit, you may not qualify to refinance your home under favorable terms. And if you make money on the deal, it will likely go to creditors if you’ve filed for Chapter 7.
Self customers can find guidance through SpringFour, which directs users to local financial resources that can help with utility savings, student loan counseling, health insurance, food, savings, down payment resources, employment services, and other areas, too.
Assistance from government sources can also help. The U.S. government offers programs to help with medical and prescription costs, your home energy bills, and paying for your telephone service. Rental assistance and other help related to the COVID-19 crisis are also available.
As mentioned above, there are also federal income-based student loan repayment plans that you may qualify for to reduce monthly student loan payments.
Charitable organizations like the Red Cross, National Assistance League, Operation Round Up (to help with utility bills), and Salvation Army may also be able to provide help.
Some debt, such as medical debt, is simply unavoidable. For large debts, see if it’s possible to negotiate payment plans with low or no interest.
When it comes to medical debt, you may be able to set up an interest-free payment plan with your provider. Some medical providers offer reduced payment plans or forgive some of the debt that low income individuals owe.
If you’ve had a costly medical procedure, you should consider asking for a line-item bill since providers may batch-charge for a set of medical procedures, some of which you may not have received. Simple steps like requesting a line-item bill from your hospital stay and disputing any charges you don’t recognize can shave thousands off your medical costs.
Those are some of the bankruptcy basics in a nutshell. Depending on your situation, a bankruptcy filing can benefit you, but there are disadvantages to filing for bankruptcy as well. It’s important to weigh the pros and the cons in light of how much you owe, your ability to repay, and your other options, before making a decision.
Once you file for bankruptcy, there’s no turning back. A bankruptcy will stay on your credit history for seven to 10 years. But it also means you can look to the future, with an eye toward rebuilding your credit without the added stress of a heavy debt burden.
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