What To Know Before Filing For Bankruptcy

What To Know Before Filing For Bankruptcy

What To Know Before Filing For Bankruptcy

Insolvency is a lengthy legal process that can affect your financial situation. So, it is important to be aware of the meaning behind bankruptcy and how it could impact you before deciding whether or not to take the next step.

Having an appropriate amount of debt is important to maintain your credit score. However, some people fall behind on their mortgages and struggle to pay back other debts. When you’ve tried other options to pay off your debts and subsequently failed, it’s time to declare bankruptcy. By filing for bankruptcy, you can reduce your debts, avoid the risk of foreclosure, and prevent collectors and creditors from contacting you. But before you decide, knowing the different types of bankruptcies and how they work is important.

Chapter 7 Bankruptcy

The most common type is Chapter 7 bankruptcy, and the purpose of this type is liquidation. The court appoints a trustee to sell non-exempt property and partially repay creditors. To be eligible to file for Chapter 7 bankruptcy, your disposable income must fall below a certain level so it can pass the means test.

This type of bankruptcy prevents filers from removing unsecured junior liens from their real property via lien stripping. It also doesn’t reduce the principal loan balance on secured debt. However, the benefit is that filers can discharge most of their debts within a few months and make a fresh start in their life.

What Chapter 7 Includes

When you’re eligible for Chapter 7, credit card debt, personal loans, and medical bills are erased so you won’t have to pay back the creditors. Assets exempt from bankruptcy include your retirement account, furniture, clothing, and cars, to some extent.

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If you currently have a mortgage for your home and are making regular payments, you can keep your home. However, if you’ve fallen behind on payments and your home is at risk of foreclosure, Chapter 7 doesn’t allow you to catch up. You can speak to an expert bankruptcy attorney at AttorneyDebtFighters to know which type suits you.

Who Usually Files for Chapter 7

This type of bankruptcy is well-suited to low-income debtors who don’t have any major assets. Usually, people who file for Chapter 7 don’t have debts such as child support or alimony. They prefer this type because they can’t commit to a repayment plan. Similarly, their debt outweighs the value of the property they’d lose.


While Chapter 7 discharges debt much more quickly, a major consequence is that it stays on your credit score for 10 years. This can impact your ability to get a loan in the future. Moreover, your trustee can sell any asset that’s not covered by an exception.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you reorganize your debts instead of erasing them. A major restriction is that you can’t have more than a certain amount of secured or unsecured debt. You also receive a discharge once you make all your payments. You can keep non-exempt property, but in the case of unsecured creditors, you must pay an amount equal to the value of your non-exempt assets.

Compared to Chapter 7, this type of bankruptcy allows you to remove unsecured junior liens via lien stripping. It also reduces the principal balance on your secured debts if you meet all the requirements. With Chapter 13, you plan to repay debts through a single monthly payment distributed through creditors.

What Chapter 13 Includes

The trustee appointed to your case won’t sell your property. However, you need to pay the creditors an amount with the same value as your non-exempt property. The amount you pay depends on the debt you have to pay, current expenses, and your income.

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Under Chapter 13, you must pay the fees for your bankruptcy attorney, the cost of filing for bankruptcy, and commissions for your trustee. Similarly, you need to pay child support costs and tax debts.

Who Usually Files for Chapter 13

This type is suitable for debtors who have a property that they want to retain. As long as you make a certain income, it’s a great option. It can prevent the court from foreclosing on your property, which allows you to catch up on mortgage payments. Moreover, debt collectors won’t be able to contact you during the process.

It’s a suitable option if you’ve defaulted on debts like child support payments or alimony so that you can catch up over the next five years. Similarly, you’ll be able to catch up on house or car payments, allowing you to keep your property.


A consequence of Chapter 13 is that you only receive a discharge after making your payments. This can take between three to five years, so there’s a high failure rate if you get laid off, sick, or divorced. You must keep up with a repayment plan; otherwise, your case could be converted to Chapter 7. This means you’ll be at risk of losing property, such as your car or home.

Process of Filing for Bankruptcy

In Chapter 7, the process lasts a few months from start to finish. In contrast, Chapter 13 takes just as long to file, but the repayment plan takes a few years to complete. There are multiple steps to bankruptcy:

  • Credit Counselling: Before declaring bankruptcy, you have to meet a credit counselor to talk about your bankruptcy filing. It’s a meeting where you talk about the different bankruptcy options and your present financial circumstances.
  • Filing Petition: Your bankruptcy attorney will write a bankruptcy petition after looking at your financial documents. It categorizes and describes your outstanding debts. 
  • Notice of Stay: The bankruptcy court will send a Notice of Stay and Notice of Filing to your creditors. When the court issues an automatic stay, creditors can only contact your lawyer. 
  • Creditor’s Meetings: After you file for bankruptcy, you, your trustee, and your attorney will attend a creditor’s meeting. In most cases, your trustee will only ask a few questions and speak to your attorney.
  • Debtor Education: Before the court can finalize your bankruptcy, you should complete attending a course on debtor education. 
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After going through the above-mentioned steps, your debt is discharged if your trustee doesn’t find any issues in your Chapter 7 filing. If you filed for Chapter 13, your debt is discharged once you complete the payment plan.

Make a Fresh Start

Making bankruptcy an option is a serious decision with lasting consequences. It is essential to be aware of the process, eligibility criteria, possible consequences for credit and assets, and the alternatives available. A professional consultation with a bankruptcy lawyer and evaluating alternatives that aren’t bankruptcy-related can assist you in making an informed decision regarding the most suitable method for your financial situation.

By filing for bankruptcy, you have the opportunity to start over with a clean slate. But before you file for Chapter 7 or Chapter 13, you should speak to a bankruptcy lawyer about your options. They can suggest the best option for your case based on your current financial situation. An expert attorney can represent you to ensure the best possible outcome for your case.