The Dos and Don'ts of Bankruptcy

Navigating the Process with Confidence

Estimated reading time: 24 minutes

I. Introduction

It is a legal process that offers individuals and businesses a way to eliminate or repay their debts while providing protection from creditors. It's a complex process with many different factors to consider, which is why it's important to have a thorough understanding of what that is and how it works.

The decision to file for bankruptcy is not one to be taken lightly, as it can have significant consequences on an individual's credit score, financial stability, and reputation. However, for those who are overwhelmed with debt and struggling to make ends meet, bankruptcy can offer a fresh start and a way out of a difficult financial situation.

In the United States, there are several different types of bankruptcy available, each with its own set of rules and requirements. The most common types of bankruptcy for individuals are Chapter 7 and Chapter 13, while Chapter 11 is primarily used for businesses.

While bankruptcy may not be the right choice for everyone, it can be a powerful tool for those who need it. In this article, we'll cover the basics of bankruptcy in the United States, including the different types of bankruptcy, who can file, the consequences of filing, and more. Whether you're considering filing for bankruptcy or simply want to learn more about the process, this guide will provide you with the information you need to make informed decisions.

II. What are the Types of Bankruptcy in the USA?

Bankruptcy laws in the United States provide different options for individuals and businesses seeking debt relief. The most common types of bankruptcy for individuals are Chapter 7 and Chapter 13, while Chapter 11 is primarily used for businesses.

A. Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also known as "liquidation bankruptcy" because it involves selling off assets to pay off creditors. It is the most common form of bankruptcy for individuals and is designed to eliminate unsecured debts, such as credit card debt and medical bills.

To file for Chapter 7 bankruptcy, individuals must meet certain eligibility requirements, including passing a means test that evaluates their income and expenses. In some cases, individuals may be required to sell certain assets to repay creditors.

Once the bankruptcy court approves a Chapter 7 bankruptcy case, a trustee is appointed to oversee the liquidation of assets and distribution of funds to creditors. Not all debts can be discharged through Chapter 7 bankruptcy, including student loans, taxes, and child support payments.

B. Chapter 13 Bankruptcy

Chapter 13 bankruptcy is also known as "reorganization bankruptcy" because it allows individuals to reorganize their debts and create a repayment plan over three to five years. It is designed for individuals who have a regular income but are struggling to keep up with their debts.

To file for Chapter 13 bankruptcy, individuals must have unsecured debts below a certain threshold and secured debts below a higher threshold. They must also have enough income to repay their debts through a repayment plan.

In a Chapter 13 bankruptcy case, a trustee is appointed to oversee the repayment plan and ensure that creditors receive the agreed-upon payments. Once the repayment plan is complete, any remaining eligible debts may be discharged.

C. Chapter 11 Bankruptcy

Chapter 11 bankruptcy is primarily used by businesses, but it can also be used by individuals with high levels of debt. It allows businesses to restructure their debts and operations, and to continue operating while they repay their creditors.

Chapter 11 bankruptcy is a complex process and involves a reorganization plan that must be approved by the bankruptcy court. It can be an expensive process, but it can also provide businesses with the opportunity to become financially stable in the long term.

Understanding the differences between these types of bankruptcy can help individuals and businesses determine which option is best for their unique financial situation. It's important to consult with a qualified bankruptcy attorney to determine the best course of action.

III. How Bankruptcy Works?

Bankruptcy is a legal process that is designed to help individuals and businesses eliminate or repay their debts while providing protection from creditors. Here are the key steps in the bankruptcy process:

A. Filing for Bankruptcy

To begin the bankruptcy process, individuals or businesses must file a petition with the bankruptcy court. The petition includes financial information such as income, expenses, assets, and liabilities. The court filing fee must also be paid at this time.

Individuals must also complete a credit counseling course within 180 days prior to filing for bankruptcy, and a debtor education course before their bankruptcy case is closed. These courses are designed to help individuals understand their financial situation and make informed decisions about their debt.

B. Automatic Stay

When a bankruptcy petition is filed, an automatic stay goes into effect, which prohibits creditors from taking collection actions against the debtor. This means that creditors cannot garnish wages, repossess property, or contact the debtor in an attempt to collect on a debt.

The automatic stay provides immediate relief to debtors who may be facing aggressive collection actions or who need time to figure out their financial situation.

C. Bankruptcy Trustee

In a bankruptcy case, a trustee is appointed to oversee the process and ensure that the debtor's assets are distributed fairly to creditors. The trustee is responsible for reviewing the debtor's financial information, conducting the meeting of creditors, and ensuring that the bankruptcy process is being followed correctly.

The trustee may also sell any non-exempt assets that the debtor has in order to pay back creditors. In Chapter 13 bankruptcy, the trustee oversees the debtor's repayment plan and ensures that the debtor is making payments on time.

D. Meeting of Creditors

The meeting of creditors, also known as the 341 meeting, is a mandatory meeting that is held between the debtor, the trustee, and any creditors who wish to attend. During this meeting, the debtor is required to answer questions about their financial situation and the circumstances that led to the bankruptcy filing.

The meeting of creditors provides an opportunity for the trustee and creditors to ask questions and obtain additional information about the debtor's financial situation.

E. Discharge of Debts

The ultimate goal of bankruptcy is to eliminate or repay debts. In a Chapter 7 bankruptcy case, eligible debts may be discharged, meaning that the debtor is no longer responsible for repaying them. In a Chapter 13 bankruptcy case, the debtor creates a repayment plan to pay off eligible debts over a period of three to five years. At the end of the repayment plan, any remaining eligible debts may be discharged.

Not all debts can be discharged in bankruptcy, including student loans, taxes, and child support payments. Additionally, bankruptcy can have a negative impact on a debtor's credit score and financial stability.

Understanding how bankruptcy works is an important part of deciding whether it is the right solution for your financial situation. It's important to work with a qualified bankruptcy attorney to ensure that you are following the correct procedures and to make the best decisions for your financial future.

IV. Who Can File for Bankruptcy in the USA?

Bankruptcy laws in the United States provide individuals and businesses with the opportunity to eliminate or repay their debts and gain a fresh start. However, not everyone is eligible to file for bankruptcy. Here's what you need to know:

A. Eligibility Requirements

To file for Chapter 7 bankruptcy, individuals must pass a means test that evaluates their income and expenses. The means test is used to determine whether the individual's income is below the median income in their state or whether they have sufficient disposable income to repay their debts.

To file for Chapter 13 bankruptcy, individuals must have unsecured debts below a certain threshold and secured debts below a higher threshold. They must also have enough income to repay their debts through a repayment plan.

Individuals who wish to file for Chapter 11 bankruptcy must be able to demonstrate that they have a viable business plan and the ability to repay their debts over time. This type of bankruptcy is primarily used by businesses, but it can also be used by individuals with high levels of debt.

B. Means Test

The means test is a calculation that compares an individual's income to the median income in their state. If the individual's income is below the median, they are eligible to file for Chapter 7 bankruptcy. If their income is above the median, they may still be eligible to file, but additional calculations are required to determine their disposable income.

Disposable income is the amount of income that is left over after necessary expenses are deducted. If the individual has sufficient disposable income to repay their debts, they may not be eligible for Chapter 7 bankruptcy and may need to file for Chapter 13 instead.

Understanding the eligibility requirements and means test for bankruptcy is important for individuals who are considering filing for bankruptcy. It's important to work with a qualified bankruptcy attorney to ensure that you meet the requirements and to make the best decisions for your financial future.

V. What Are the Consequences of Filing for Bankruptcy?

Filing for bankruptcy can provide much-needed relief for individuals and businesses struggling with debt, but it also comes with several significant consequences to consider. Here are a few of the most significant consequences:

Filing for bankruptcy can have a significant negative impact on a debtor's credit score. Bankruptcy remains on a credit report for up to 10 years, and it can be difficult to obtain credit or loans during this time. Additionally, even after the bankruptcy has been removed from the credit report, the debtor may still struggle to obtain credit due to the negative impact on their credit history.

Bankruptcy is often viewed as a last resort for individuals and businesses in financial distress. As a result, there may be a stigma associated with filing for bankruptcy that can make it difficult for debtors to move forward. This stigma can also make it difficult for debtors to obtain employment or housing in some cases.

Filing for bankruptcy can also result in restrictions on future credit opportunities. For example, debtors may be required to pay higher interest rates or put down larger down payments to obtain credit or loans. Additionally, debtors may not be able to obtain certain types of credit, such as credit cards, for a period of time after filing for bankruptcy.

Understanding the potential consequences of filing for bankruptcy is important for individuals and businesses considering this option. It's important to work with a qualified bankruptcy attorney to weigh the pros and cons of bankruptcy and to make the best decisions for your financial future.

VI. Debts That Can and Cannot be Discharged in Bankruptcy

Filing for bankruptcy can provide relief for individuals and businesses struggling with debt, but not all debts can be discharged in bankruptcy. Understanding which debts can and cannot be discharged is an important part of the bankruptcy process. Here's what you need to know:

A. Dischargeable Debts

Chapter 7 bankruptcy allows for the discharge of most unsecured debts, such as credit card debt, medical bills, and personal loans. In Chapter 13 bankruptcy, debtors can include a wide range of debts in their repayment plan, which can lead to the discharge of a portion of their debts.

Here are some examples of debts that can be discharged in bankruptcy:

• Credit card debt
• Medical bills
• Personal loans
• Past due rent and utility bills
• Civil judgments

B. Non-Dischargeable Debts

There are several types of debts that cannot be discharged in bankruptcy. Some of these debts may be included in a repayment plan, but they cannot be eliminated completely. Here are some examples of debts that cannot be discharged in bankruptcy:

Student loans: In most cases, student loans cannot be discharged in bankruptcy. However, there are some exceptions, such as if the debtor can demonstrate that repaying the loan would cause undue hardship.

Certain tax debts: Some tax debts may be dischargeable in bankruptcy, but others cannot be eliminated. Generally, income tax debts that are more than three years old and meet certain other criteria may be discharged in bankruptcy.

Debts owed to government agencies: Debts owed to government agencies, such as fines or penalties, cannot be discharged in bankruptcy.

Debts incurred as a result of fraud or intentional wrongdoing: Debts incurred through fraud or intentional wrongdoing cannot be discharged in bankruptcy. For example, if a debtor incurs debt through embezzlement, those debts cannot be discharged.

Debts related to divorce or child support: Debts related to divorce or child support cannot be discharged in bankruptcy. These debts are considered priority debts and must be repaid.

Understanding which debts can and cannot be discharged in bankruptcy is important for individuals and businesses considering this option. It's important to work with a qualified bankruptcy attorney to ensure that all eligible debts are included in the bankruptcy and to make the best decisions for your financial future.

VII. How Long Bankruptcy Stays on Your Credit Report

Filing for bankruptcy can have a significant impact on your creditworthiness. One of the most important factors to consider is how long bankruptcy will stay on your credit report. Here's what you need to know:

A. Reporting Period for Different Types of Bankruptcy

The amount of time that bankruptcy stays on your credit report varies depending on the type of bankruptcy you file. Here are the reporting periods for different types of bankruptcy:

• Chapter 7 Bankruptcy: Chapter 7 bankruptcy stays on your credit report for up to 10 years from the date of filing. This is the longest reporting period for any type of bankruptcy.
• Chapter 13 Bankruptcy: Chapter 13 bankruptcy stays on your credit report for up to 7 years from the date of filing. This is shorter than the reporting period for Chapter 7 bankruptcy, but still a significant amount of time.

B. Impact on Creditworthiness

Bankruptcy can have a significant negative impact on your creditworthiness. In addition to the bankruptcy itself staying on your credit report for several years, the negative impact on your credit score can make it difficult to obtain credit or loans.

During the time that bankruptcy is on your credit report, lenders may view you as a high-risk borrower, which can result in higher interest rates and fees. It can also make it difficult to obtain credit, such as credit cards or loans, during this time.

While it's possible to rebuild your credit after bankruptcy, it can take time and effort. One strategy for rebuilding credit is to obtain a secured credit card and make timely payments. It's also important to check your credit report regularly to ensure that all information is accurate and up-to-date.

Understanding how long bankruptcy stays on your credit report is an important part of the bankruptcy process. It's important to work with a qualified bankruptcy attorney to ensure that you are making the best decisions for your financial future.

VIII. How Bankruptcy Affects Your Credit Score?

Filing for bankruptcy can have a significant negative impact on your credit score. Here's what you need to know:

A. Negative Impact on Credit Score

Bankruptcy can have a significant negative impact on your credit score. This is because bankruptcy is viewed as a last resort for individuals and businesses in financial distress. As a result, lenders may view you as a high-risk borrower, which can result in higher interest rates and fees.

The negative impact on your credit score can make it difficult to obtain credit or loans during the time that bankruptcy is on your credit report. It can also impact your ability to rent an apartment or obtain certain types of employment.

B. Impact on Creditworthiness

Bankruptcy can have a significant negative impact on your creditworthiness. In addition to the bankruptcy itself staying on your credit report for several years, the negative impact on your credit score can make it difficult to obtain credit or loans.

During the time that bankruptcy is on your credit report, lenders may view you as a high-risk borrower, which can result in higher interest rates and fees. It can also make it difficult to obtain credit, such as credit cards or loans, during this time.

While it's possible to rebuild your credit after bankruptcy, it can take time and effort. One strategy for rebuilding credit is to obtain a secured credit card and make timely payments. It's also important to check your credit report regularly to ensure that all information is accurate and up-to-date.

Understanding how long bankruptcy stays on your credit report is an important part of the bankruptcy process. It's important to work with a qualified bankruptcy attorney to ensure that you are making the best decisions for your financial future.

IX. Keeping Assets When Filing for Bankruptcy

When filing for bankruptcy, one concern that many people have is whether they will be able to keep their assets. Here's what you need to know:

A. Exempt vs. Non-Exempt Assets

In bankruptcy, assets are typically classified as either exempt or non-exempt. Exempt assets are those that are protected from liquidation in bankruptcy. Non-exempt assets can be sold by the bankruptcy trustee to pay off creditors.

Each state has its own list of exempt assets, and the list of exempt assets can vary depending on the type of bankruptcy you file. For example, Chapter 7 bankruptcy allows for the liquidation of non-exempt assets to pay off creditors, while Chapter 13 bankruptcy allows for the retention of all assets as long as the debtor is able to repay their debts through a repayment plan.

B. Homestead Exemption

The homestead exemption is a common exemption that protects the equity in your primary residence. The amount of the homestead exemption varies by state, but it typically ranges from a few thousand dollars to several hundred thousand dollars.

In some states, the homestead exemption applies only to a certain amount of equity in the home, while in other states, the homestead exemption is unlimited. In some states, the homestead exemption also applies to mobile homes and other types of residences.

C. Personal Property Exemption

In addition to the homestead exemption, there are also exemptions available for personal property. These exemptions can protect assets such as clothing, furniture, and household goods.

The amount of personal property that is exempt varies by state. In some states, the exemption is a specific dollar amount, while in others, it is a list of specific items that are protected. In some cases, there may be additional exemptions available for items such as tools of the trade, retirement accounts, or vehicles.

Understanding the exemptions available for assets is an important part of the bankruptcy process. It's important to work with a qualified bankruptcy attorney to ensure that you are taking full advantage of all available exemptions and to make the best decisions for your financial future.

X. Filing for Bankruptcy Multiple Times

In some cases, individuals may need to file for bankruptcy multiple times. Here's what you need to know:

A. Time Limitations Between Bankruptcy Filings

There are time limitations on how often you can file for bankruptcy. If you have previously filed for bankruptcy and received a discharge, the time limitations are as follows:

• Chapter 7 Bankruptcy: If you previously filed for Chapter 7 bankruptcy and received a discharge, you must wait 8 years from the date of filing before you can file again.
• Chapter 13 Bankruptcy: If you previously filed for Chapter 13 bankruptcy and received a discharge, you must wait 2 years from the date of filing before you can file for Chapter 13 again, and 4 years before you can file for Chapter 7.

If you file for bankruptcy before the time limitations have expired, the court may dismiss your case or you may not be eligible for a discharge of your debts. It's important to work with a qualified bankruptcy attorney to ensure that you are filing at the appropriate time and making the best decisions for your financial future.

B. Circumstances Under Which Multiple Filings May Be Allowed

In some cases, individuals may need to file for bankruptcy multiple times due to circumstances beyond their control, such as job loss, unexpected medical expenses, or other unforeseen events. In these cases, it may be possible to file for bankruptcy again before the time limitations have expired.

However, multiple filings can be more complicated than a single filing. In particular, the bankruptcy court will closely scrutinize the reasons for the multiple filings and may impose additional requirements or restrictions. It's important to work with a qualified bankruptcy attorney to ensure that you are filing appropriately and making the best decisions for your financial future.

Understanding the time limitations and circumstances under which multiple filings may be allowed is an important part of the bankruptcy process. It's important to work with a qualified bankruptcy attorney to ensure that you are taking full advantage of all available options and making the best decisions for your financial future.

XI. Choosing a Bankruptcy Attorney

When filing for bankruptcy, it's important to work with a qualified bankruptcy attorney to ensure that you are making the best decisions for your financial future. Here are some factors and qualifications to consider when choosing a bankruptcy attorney:

Factors to Consider

• Experience: Look for an attorney who has experience in bankruptcy law and has handled cases similar to yours. The more experience an attorney has, the more likely they are to understand the nuances of bankruptcy law and be able to anticipate potential problems and opportunities.
• Reputation: Look for an attorney who is well-respected in the legal community and has a good reputation among clients. You can often get a sense of an attorney's reputation by reading reviews online, asking for references from other clients, or consulting with other attorneys in your community.
• Communication: Look for an attorney who is responsive to your questions and concerns and keeps you informed throughout the bankruptcy process. Filing for bankruptcy can be a complex and stressful process, and it's important to work with an attorney who is supportive and communicative throughout.
• Fees: Look for an attorney who is transpar