Like many Americans, you may have recently experienced a financial hardship and wonder how bankruptcy works. The purpose of this article is to explain how bankruptcy works, explain the costs of bankruptcy, show alternatives, and give you free tools to make the most informed decision.
In short, bankruptcy is a legal debt relief option to help you get debt relief from your debts, including unsecured credit cards, medical bills, unsecured personal loans, payday loans, and other debts that are not secured by an asset.
Here’s what we will cover:
How Does Bankruptcy Help You With Your Debt?
Bankruptcy can discharge (forgive) certain debts, which can provide a fresh start. What are the types of your debt? The types of your debt will help determine whether they will be eliminated in bankruptcy.
Debts that are often forgiven:
- Credit cards
- Medical debts
- Personal loans
- Old utility bills
- Many judgment debts
- Old rent and lease payments
Debts that are not often forgiven:
- Student loans
- Secured debts such as home and car
- Back alimony or child support payments
- Most debts owed to the government
- Judgments related to DUI accidents
- Most tax debts
- Administrative costs of the bankruptcy case
- Restitution in criminal cases
One thing that can be helpful is to determine which debts you will have forgiven and which debts may not be forgiven in bankruptcy.
How Does Bankruptcy Work?
The first step in the bankruptcy process is to understand the differences between common bankruptcy chapters.
There are two common types of consumer bankruptcy are Chapter 7 and Chapter 13. You have to qualify for a Chapter 7 bankruptcy. Many people qualify for Chapter 13 bankruptcy as long as they are below the debt limits.
Let’s cover some of the differences between Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
- You receive your discharge fast in as little as 90 days.
- The Chapter 7 is less expensive than Chapter 13 bankruptcy
- The Chapter 7 is on your credit report for 10 years. You should read how bankruptcy affects your credit though as you are often able to get access to credit much sooner.
- In a Chapter 7, you often have to qualify based on income, household size and state
- You may lose assets. It’s often note the case, but it’s important to know.
Chapter 13 Bankruptcy
- You receive discharge often in 3 or 4 years
- The Chapter 13 is more expensive than Chapter 7 bankruptcy
- The Chapter 13 is on on your credit report for 7 years.
- Many people qualify as long as they are under debt limits
- You often keep assets.
The rest of the bankruptcy process is rather straightforward.
Understand the Bankruptcy Process
You may want to read this bankruptcy process article if you are reading this and thinking that this is a good option for you. From a high level, here’s the rest of the process:
- Estimate Chapter 7 qualification using a Chapter 7 means test calculator.
- Determine whether to hire an attorney. Many do.
- Get a free evaluation with a local attorney. Most are telephonic. We wrote a detailed article how to choose a bankruptcy attorney for the free evaluation.
- Understand Attorney Fee and Costs. We will explain this more in detail below.
- Get a mandatory Credit Counseling Course
- File Petition and Other Forms
- The trustee is assigned to the case
- The 341 Meeting of Creditors Takes Place
- Take second mandatory debt education course
- Receive your discharge
How Much Does Bankruptcy Cost Me?
We built a bankruptcy attorney fee calculator to help you estimate the exact costs by bankruptcy chapter and by your city, but the gist is there are a couple of main costs:
- Filing Fees: The filing fees are generally between $300-$400
- Attorney Fees: This depends on your location among the complexity of the case. A Chapter 7 bankruptcy attorney fee can range from $600-$2500. A Chapter 13 bankruptcy can range from $2500 – $5000+, paid in the bankruptcy plan.
If you would like a more detailed view of the bankruptcy costs, you can read our article covering bankruptcy costs.
What Would I Do?
If you are early in the process where you are just trying to figure out what you are going to do, I would probably recommend accessing our free bankruptcy decisioning portal. The portal is aimed to be the one stop shop to get all of your bankruptcy questions answered. You can estimate qualification, costs, compare alternatives and get access to a free evaluation with a local, reputable bankruptcy attorney or another debt relief provider.