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Everyone goes through a rough patch financially, at least every once in a while. If the rough times keep coming, and your debts are fast outpacing your income, it might be time to consider filing for bankruptcy. Are you buried under a mountain of debt and wondering, “should I file for bankruptcy?” If so, this guide is for you! 

When you feel like you’re out of options and you’re looking for a path forward, it’s normal to feel confused and have a lot of questions. This guide to deciding if or when should you file bankruptcy will answer your questions and help you consider your options.

Let’s start with an answer to the most basic question:

What Is Bankruptcy?

First of all, remember what bankruptcy is NOT; bankruptcy is not a failure. Bankruptcy is a new start or a solution to a problem. When you file for bankruptcy, you’re doing something about the debts and bills you owe, rather than ignoring them. It’s your chance to start again with a clean slate and do things right. Some people consider bankruptcy to be a last resort option that leaves a long-term stain on your financial and personal history. There is a definite social stigma associated with declaring bankruptcy. 

Look at it in a different way. 

Bankruptcy is the legal process of declaring that you are unable to pay your debts. Filing for bankruptcy begins the process of debt consolidation: forgiveness of debts you cannot pay, and coming up with a payment plan for the ones you can based on your available assets. 

Who Can File Bankruptcy?

Anyone can file for bankruptcy. The real question is what kind of bankruptcy filing you might qualify for. There are two types of bankruptcy filings: Chapter 7 bankruptcy and Chapter 13 bankruptcy. Neither type will erase your debt completely, but they can help you get back on your feet. Let’s take a closer look at both of them.

Chapter 7 Bankruptcy

This type of bankruptcy is designed for people who truly do not have the ability to make ends meet and pay all their bills. It is sometimes referred to as “straight bankruptcy,” and it truly is a fresh start that liquifies your assets to pay creditors and allows you to start again. You qualify for this kind of bankruptcy filing based on your income, which must be less than the median earnings for a family of your size that is living in your state. This number will obviously vary based on where you live, how many dependents you have, and may change from year to year. If your income is too high, you may attempt to pass a means test. A representative from the court will examine your income and assets to determine if you really could pay the debts if you used your money more wisely or tapped into available resources. 

If you qualify for chapter 7 bankruptcy, all of your available assets will be taken to pay off your debts—you may lose your home, any land you own, or a small family business. Some people may want to avoid filing for Chapter 7 bankruptcy so they don’t risk losing these things, and some people may have an income that is too high to qualify. In these situations, a chapter 13 bankruptcy filing might be a better scenario.

Chapter 13 Bankruptcy 

This type of bankruptcy is sometimes called the “wage-earner’s bankruptcy.” Rather than offering a fresh slate, it gives you a reorganization of debt and a grace period for repayment that lasts three to five years. Chapter 13 bankruptcy requires that filers have a steady source of income with secured debts totaling less than $1,184,200 (home, car, mortgage, etc.) and unsecured debts less than $394,725 (medical bills, credit cards, personal loans). Once you are approved for Chapter 13 bankruptcy, creditors must stop contacting you, and you must continue to work and pay off debts over the next few years according to the terms of the bankruptcy, while keeping your property and other assets.

Chapter 7 bankruptcy will remove credit card debt, medical bills, personal loans, lawsuit judgments, and debts from leases or other contracts. Chapter 13 will wipe out all of these, plus any debts that come from divorce or debt from loans taken out on a retirement plan. Neither type of bankruptcy filing will remove student debts, alimony, income taxes, child support payments, debts for injury caused by drunk driving, or any debts to government agencies, including court fines.

Which Bankruptcy Should I File?

The bankruptcy you should file really comes down to income and assets. If your income is determined to be below the average in your state for a family your size, then you can apply for Chapter 7 bankruptcy. Or, you may submit to a means test to determine if your combined income and assets aren’t able to cover your debts, meaning you truly need the relief of a clean slate. 

If you don’t qualify for Chapter 7 based on income or the means test, you may qualify for Chapter 13 bankruptcy. This type of bankruptcy offers a softer landing than a blank slate, as it allows you to work with creditors over a 3- to 5-year grace period to repay your debts without losing your home, business, or other property. If your biggest problem is constant demands for immediate repayment on debt, but not earning an income, then Chapter 13 may be the best route for you. Sometimes, even people who qualify for Chapter 7 bankruptcy choose to file for Chapter 13 to avoid losing their family home or other assets to pay back their creditors.

How Hard Is It to File Bankruptcy?

Bankruptcy is designed to help people who truly need it. Filing for bankruptcy is not a quick and easy process, mostly to deter fraudulent filings, defrauding creditors, and running up big debts intentionally. To file for bankruptcy, you will need to fill out forms and gather financial records, including proof of income and personal tax returns. You will also need to attend a credit counseling class, which can be done online, and produce a certificate of attendance. 

These documents, along with a filing fee, must be brought to your local courthouse to file for bankruptcy. A court trustee will be assigned to your case and will meet with you and determine the outcome of your filing. This process can be time-consuming and at times challenging, but may result in the discharge of your debts and a fresh start free from the burden of your debts.

How Many Times Can You File Bankruptcy?

There is no limit to the number of times you can file bankruptcy. But there is a waiting period between filings. You’ll have to wait eight years after the filing date of a Chapter 7 bankruptcy before you can apply again, and two years after a Chapter 13 filing.

Filing for bankruptcy is not a failure. It is an important step that will take you closer to managing your debts and living in financial freedom. Whether or not you are ready for bankruptcy filings, start now to get your debt under control by getting a free debt assessment today.

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