*Disclaimer: We are not personal bankruptcy attorneys so if you decide that filing for personal bankruptcy is your only option and you qualify, hire an attorney to make sure someone is on your side throughout the process.
How to Use This Guide
We scoured hundreds of U.S. bankruptcy documents to help you make sense of the bankruptcy process.
We explain the two kinds of bankruptcy and how to determine which filing type is available to you.
Impact on your credit
Filing for bankruptcy will destroy your credit score. We are talking a 200-400 point fall, out of 850 points, depending on your starting score.
Your score will end up in the “poor” scoring category no matter how good you were with credit before the filing.
For most people considering bankruptcy you probably already have a low score from your mounting debts and late payments, so a formal filing won’t cause more than a 100 point swing in your score.
How Long is a Bankruptcy on Your Record?
A bankruptcy is on your record for 10 years, this is non-negotiable. It will only hurt your score for 7 years but will show up on your report for 10 and may impact your ability to borrow money.
A bankruptcy has the most negative impact on your score on day 1. Your score will recover with the passing of time and will go up even faster if you take out a new credit card and are responsible in paying all balances every 30 days and only borrowing 30% or less of your limit in any one month.
There are Two Types of personal bankruptcy
Chapter 7
All of your assets are taken from you including any cash you have in checking or savings accounts and used to pay your lenders. After that, all of your remaining debts will go away in 45-60 days.
Pros
- Under chapter 7 you can have all or most of your debt discharged, which is a fancy way for saying you won’t have to pay back the money.
- After your filing is approved by a judge all of your debts will be forgiven relatively quickly, likely within 45-60 days after approval.
- You can begin repairing your credit more quickly than in chapter 13 because the process is much quicker.
Cons
- All of your assets will be seized and liquidated to pay your debts, meaning they will take your house, your car and any other assets you bought with a secured loan plus the cash you have in a checking or savings account.
- If you really want to stay in your house or keep your car and think you can catch up on your mortgage or car payments then chapter 13 is likely a better option.
Cost – $335 of court fees to file. You can pay in installments or the court will let you file for free if your income is less than 1.5x the poverty level.
Chapter 13
Under chapter 13 you agree to repay all or part of your debts through a 3- to 5-year repayment plan.
You submit a repayment plan to the court and then begin paying the court who distributes the money to your creditors. Once the 3 to 5 years are up any remaining debts go away.
Pros
- Some of your debts will be forgiven in chapter 13 too, but that all depends on how much you make and how large your debts are.
- Your assets will not be liquidated so you can keep your house or car as long as you have the ability to catch up on any late payments over your court appointed payment plan and are able to continue paying your mortgage or car payment after your payment plan is over.
- Paying off people you owe is made easier as you just pay all the money you can to the court and they will deal with paying off each individual person you owe.
Cons
- You will have to pay at least some of your debts, unlike chapter 7. Chapter 7 will save you more money if you qualify.
Cost – $310 filing fee. You can pay this fee in installments with the court’s permission, so make sure to ask if you can’t afford the fee up front.
How to qualify for Chapter 7
Step 1
Take the AVERAGE of the last 6 months of your gross pay (the amount at the very top of your pay stub) then multiply by 12. If this amount is less than your state’s median income for a family of your size, you can file for chapter 7.
Check your state’s median income —› LINK
If you are calculating your gross pay use this online resource for some examples of income to make sure you don’t miss any sources of cash.
If you don’t pass….
Step 2
You need to pass a means test so the government can make sure you don’t make more than enough money and are just abusing the system to get out of your debts.
To pass the means test you need to prove ONE of the following:
- Your latest monthly disposable income x 60 is LESS THAN $7,700
- Your latest monthly disposable income x 60 is between $7,700-$12,850 and is NOT ENOUGH to pay off 25% of your unsecured debt (usually credit card debt).
- You were in the military and served after 9/11/2001 for at least 90 days AND are filing for bankruptcy less than 540 days (1.5 years) since you were discharged from the military.
If you can say yes to either of these three conditions than congratulations! you can file for chapter 7.
To calculate your monthly disposable income, click here.
Or if you want to be absolutely sure, use the government’s official 122A-2 form which includes all sources of deductions you can take to decrease your disposable income number.
If you don’t pass this test the court will not let you file for chapter 7 and you will have to file for chapter 13.
If you do pass the test you have to receive credit counselling from an approved credit counseling agency.
The counselling can often be done online and will take 2-3 hours.
A resource for finding approved credit counsellors in your area is HERE.
How to qualify for Chapter 13
Chapter 13 is much easier to figure out than chapter 7.
If you have unsecured debt under $383,175 or secured debt under $1,149,525 then you can go ahead and file for chapter 13.
How it works
In chapter 13, a court-appointed trustee will set up a 3- or 5-year payment plan after negotiating on your behalf with creditors.
3 Year Plan – Your monthly income is less than the median in your state
5 Year Plan -Your monthly income is more than the median in your state
After the payment plan is over, any unsecured debts will go away as long as your lenders get as much cash back as they would have gotten from selling all of your assets seized in chapter 7.
You are able to keep your home, car, or any other secured debts as long as you catch up with any missed payments over the court-appointed payment period and stay current with future payments on these loans.
Bottom Line
You have to pay out all your spare cash to pay off the loans and if you make your best effort to pay your creditors all the remaining unsecured debt goes away.
How often can you file for bankruptcy?
Chapter 7 – Filing allowed once every 8 years.
Chapter 13 – Filing allowed once every 2 years.
File chapter 7 then want to file chapter 13 – must wait 4 years to file.
File chapter 13 then want to file chapter 7 – Must wait 6 years to file..
Summing it All Up
Hopefully, you now have the tools you need to decide if filing for bankruptcy is the best path to rescuing your financial future.
Approach bankruptcy with a positive attitude and stay determined to fix your credit and you can come out on the other side with a higher score than you ever had before!
About Author
The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.