Personal bankruptcy is a legal process that provides individuals with overwhelming debt an opportunity for financial relief and a fresh start. It involves filing a petition in court, usually under Chapter 7 or Chapter 13 in the United States, detailing financial assets and liabilities. Under Chapter 7, most unsecured debts are discharged, but certain assets may be sold to repay creditors. Chapter 13 involves creating a repayment plan to pay back debts over time. While bankruptcy can alleviate financial stress, it has long-term consequences, including a negative impact on one’s credit score, which may affect borrowing capabilities for several years.

In this guide, we will help you understand, personal bankruptcy, its impacts, and unpack all of the pros and cons to help you make an informed decision.

Types of Personal Bankruptcy To File

In the United States, the most common types of personal bankruptcy are Chapter 7 and Chapter 13. Some other countries have similar processes but the names and regulations can differ.

1. Chapter 7 – Liquidation: This is often referred to as “straight” or “liquidation” bankruptcy. Under Chapter 7, most of your unsecured debts—like credit card and medical bills—are wiped out. However, non-exempt assets may be sold by a court-appointed trustee to pay back creditors. Exempt assets, which vary by state, are generally necessities like a certain amount of home equity, basic household goods, and a modest car.
2. Chapter 13 – Reorganization: In a Chapter 13 bankruptcy, you enter into a repayment plan to pay back all or a portion of your debts over a 3 to 5-year period. Unlike Chapter 7, you can keep all your assets, including non-exempt property, as long as you complete the payment plan. This type is more suitable for those with a regular income and the desire to protect assets like a home from foreclosure.
3. Chapter 11 – Individual Reorganization (Rare): Although typically used for businesses, some individuals with extremely high debt or complex financial situations may file for Chapter 11 bankruptcy. It also involves a reorganization plan but offers more flexibility than Chapter 13. However, it is more costly and time-consuming.
4. Chapter 12 – Family Farmers and Fishermen: This is specialized bankruptcy designed for family farmers and fishermen who have a regular annual income but are facing financial distress. Chapter 12 allows for a debt repayment plan, similar to Chapter 13 but with added benefits specific to the farming and fishing industries.
5. Chapter 15 – Cross-Border Cases: This is mainly applicable for cases involving debtors, assets, and creditors that span international borders. While not specifically a “personal” bankruptcy, it can apply to individuals involved in such situations.

Each type of bankruptcy comes with its own set of rules, eligibility criteria, and consequences, so it’s advisable to consult with a legal advisor to determine the most appropriate course of action for your specific financial situation.

 Am I Eligible to Declare Personal Bankruptcy?

Eligibility for personal bankruptcy varies depending on the type of bankruptcy being considered and the jurisdiction. In the United States, the following are general conditions that need to be met for the most common types of personal bankruptcy, Chapter 7 and Chapter 13:

Chapter 7 Eligibility:

1. Means Test: Applicants must pass a “means test” that examines their income level. If your income is below the median for a household of your size in your state, you’re generally eligible. If it’s above, additional calculations are made to determine eligibility.
2. Credit Counseling: You must complete credit counseling from an approved agency within 180 days before filing.
3. No Recent Bankruptcies: You’re not eligible if you’ve had debts discharged under Chapter 7 within the past eight years or under Chapter 13 within the past six years.
4. No Fraudulent Activities: Individuals who have defrauded creditors or abused the bankruptcy system may be deemed ineligible.

Chapter 13 Eligibility:

1. Regular Income: You must have a regular income sufficient to make the proposed repayment plan payments.
2. Debt Limits: Varying each year, unsecured debts must be less than $419,275, and secured debts must be less than $1,184,200. These amounts are adjusted periodically. Collectively, total secured, and unsecured debts must be less than $2,750,000.
3. Tax Filings: You must be up-to-date with your tax filings for the four years preceding the bankruptcy filing.
4. Credit Counseling: Similar to Chapter 7, you must complete credit counseling from an approved agency within 180 days before filing.
5. No Recent Bankruptcies: You can’t file for Chapter 13 if you’ve had a previous Chapter 7 discharge within the last four years or a Chapter 13 discharge within the last two years.

Other Types:

• Chapter 11: Rare for individuals due to its complexity and cost, but if used, generally there are no debt limits.
• Chapter 12: Designed for family farmers and fishermen; eligibility is based on specific financial and occupational criteria.

Different jurisdictions may have additional or varying requirements. Given the complex nature and long-term consequences of bankruptcy, it is advisable to consult with a legal advisor to determine eligibility and the most suitable course of action.

Is Filing Personal Bankruptcy Worth it?

The decision to file for personal bankruptcy is complex and depends on individual circumstances, such as the type and amount of debt, assets, income, and long-term financial goals. Bankruptcy can provide immediate relief from overwhelming debt and halt actions like foreclosure, repossession, or wage garnishment. It can offer a “fresh start” by discharging unsecured debts in a Chapter 7 filing or by restructuring debts in a manageable repayment plan under Chapter 13.

However, the downsides are significant. Your credit score will take a severe hit, making it difficult to secure loans or credit at favorable rates for several years. There may also be social stigma, increased insurance premiums, and limited employment opportunities in certain sectors. Additionally, not all debts can be discharged, such as student loans, alimony, and certain taxes.

Given these trade-offs, filing for bankruptcy should be a last resort after exploring other debt-relief options and consulting with financial and legal experts. Whether it is “worth it” varies from person to person based on their unique financial landscape and future prospects.

Is Declaring Personal Bankruptcy Bad?

Declaring personal bankruptcy isn’t inherently “bad,” but it does come with significant consequences. It offers immediate relief from overwhelming debt and may prevent foreclosure or repossession of assets. However, it severely impacts your credit score, making future borrowing expensive and challenging for several years. It can also affect employment opportunities in certain fields and carries a social stigma. Bankruptcy remains on your credit report for up to 10 years, affecting your financial life long-term. The decision should be a last resort, considered carefully with the advice of financial and legal experts to weigh the pros and cons.

Pros and Cons of Declaring Personal Bankruptcy

Before declaring a personal bankruptcy, each individual should seek legal counsel to understand their options, and the pros and cons of each choice. Below is a summary of what advantages and disadvantages you might experience.

Pros of Declaring Personal Bankruptcy:

1. Debt Discharge: Most unsecured debts can be discharged, providing a financial “fresh start.”
2. Automatic Stay: Immediate halt on collections, lawsuits, foreclosures, and wage garnishments, offering temporary relief.
3. Asset Protection: Chapter 13 allows you to keep all your assets, while Chapter 7 provides exemptions for basic assets, such as a home or car up to a certain value.
4. Structured Repayment: Chapter 13 offers a manageable repayment plan to gradually eliminate debt.
5. Psychological Relief: Easing the emotional toll of constant financial stress and creditor harassment.

Cons of Declaring Personal Bankruptcy:

1. Credit Score Impact: Severe negative effect on credit score, making future borrowing difficult and expensive.
2. Long-term Record: Remains on your credit report for 7-10 years, affecting financial opportunities.
3. Limited Debt Relief: Not all debts are dischargeable, such as student loans, alimony, child support, and some taxes.
4. Asset Liquidation: Risk of losing non-exempt assets in Chapter 7.
5. Cost: The cost to file bankruptcy includes legal fees, court fees, and other fees can be substantial, especially for Chapter 13 and 11.
6. Employment Concerns: May affect job prospects, particularly in finance and certain government positions.
7. Social Stigma: Bankruptcy can carry a social stigma, affecting personal and professional relationships.

The decision to file for bankruptcy should be taken after careful consideration of these pros and cons, ideally in consultation with financial and legal advisors.

When to File Personal Bankruptcy

The decision to file for personal bankruptcy is highly personal and dependent on various factors. Here are some circumstances under which it might be appropriate:

1. Overwhelming Unsecured Debt: If you have unmanageable debt like medical bills or credit card balances that you can’t feasibly repay, bankruptcy can offer a fresh financial start.
2. Legal Actions: If you are facing lawsuits, wage garnishments, or foreclosure, bankruptcy can provide a legal “automatic stay” to halt these processes temporarily, allowing you time to sort out your finances.
3. Asset Protection: In Chapter 13, if you have valuable non-exempt assets that you want to protect from liquidation, the structured payment plan can help you keep those assets while repaying debt.
4. No Other Options: Bankruptcy might be the right choice when you’ve exhausted other avenues for debt relief, such as debt consolidation or negotiation, without success.
5. Emotional Stress: The psychological toll of carrying significant debt can be overwhelming. Bankruptcy can sometimes offer not just financial but also emotional relief.
6. Long-Term Outlook: Consider your future income prospects. If you anticipate being in the same or worse financial condition for the foreseeable future, bankruptcy may offer a way out.

However, due to the serious financial consequences—such as a severe hit to your credit score, potential asset loss, and long-term impact on borrowing capabilities—bankruptcy should be viewed as a last resort. Always consult with financial and legal advisors to carefully weigh the pros and cons in the context of your unique situation before making such a significant decision.

How Long is Credit Impacted After Declaring Personal Bankruptcy

The length of time that your credit will be impacted after declaring personal bankruptcy depends on the type of bankruptcy filed. In the United States:

1. Chapter 7 Bankruptcy: This stays on your credit report for 10 years from the filing date. Given that most of your debts are discharged and you don’t have to pay them back, creditors see you as a high risk, which is why it stays on your report for a decade.
2. Chapter 13 Bankruptcy: This stays on your credit report for 7 years from the filing date. Since you’re paying back some of the debt through a court-ordered repayment plan, Chapter 13 is considered less damaging than Chapter 7, but it still has a significant impact.
3. Other Types: Less common types like Chapter 11 or 12 have their own rules but are generally consistent with Chapter 13 in terms of credit impact duration.

During these periods, you’ll likely find it difficult to qualify for new credit, or you may be offered credit at much higher interest rates. Some landlords and employers also check credit histories, so a bankruptcy could affect housing and employment opportunities as well.

It’s worth noting that while the bankruptcy itself remains on your credit report for 7-10 years, the individual accounts that were included in the bankruptcy will be marked as “discharged” or “included in bankruptcy.” These will typically fall off your credit report after 7 years.

However, it’s possible to start rebuilding your credit even while the bankruptcy remains on your credit report, but it will require disciplined financial behavior and time.

How to File Personal Bankruptcy – Step By Step

Filing for personal bankruptcy is a complex legal process that can have significant financial and emotional consequences. Therefore, it’s strongly advised that you consult with experienced financial advisors and bankruptcy attorneys to help you navigate this complicated territory. Below is a general step-by-step guide for filing personal bankruptcy in the United States, typically under Chapter 7 or Chapter 13.

Preliminary Steps

1. Consult Financial Advisors: Assess your financial situation to understand the extent of your debts, assets, and liabilities.
2. Credit Counseling: Complete a credit counseling course from an approved agency within 180 days before filing. This is a prerequisite for both Chapter 7 and Chapter 13 bankruptcy.
3. Consult a Bankruptcy Attorney: It’s highly advisable to consult an attorney specialized in bankruptcy law to help determine which type of bankruptcy is most suitable for you.

Preparing the Paperwork

• Collect Financial Documents: Gather all relevant financial documents like pay stubs, tax returns, mortgage documents, loan agreements, and a list of assets.
• Bankruptcy Forms: Download and complete the necessary bankruptcy forms. This will include a petition, schedules detailing your assets, liabilities, income, and expenses, among other forms.
• Means Test: For Chapter 7, complete the Means Test calculation form to confirm eligibility based on income. Chapter 13 filers don’t need a Means Test but should prepare a proposed repayment plan.

Filing the Case

• Filing Fee: Pay the filing fee for the appropriate bankruptcy chapter.The cost is $338 for Chapter 7 and $313 for Chapter 13. Some people may qualify for a fee waiver.
• Submit Paperwork: File the completed forms and any required documents with the bankruptcy court in your jurisdiction. This officially initiates the bankruptcy process.
• Automatic Stay: Upon filing, an “automatic stay” goes into effect, halting most collection activities against you.

Post-Filing Steps

1. 341 Meeting: Attend the “341 Meeting of Creditors,” where you and your attorney meet with the bankruptcy trustee and possibly some creditors. You’ll answer questions about your financial situation and bankruptcy forms.
2. Additional Courses: Complete a debtor education course from an approved agency. You’ll need to submit the completion certificate to the court.

Discharge and Beyond

1. Plan Confirmation: For Chapter 13, the court will need to approve your repayment plan. Once approved, you’ll make monthly payments to the trustee.
2. Debt Discharge: For Chapter 7, after all required steps are completed and the trustee has administered any non-exempt assets, most of your unsecured debts will be discharged. For Chapter 13, this occurs after you’ve completed the payment plan.
3. Post-Bankruptcy Credit Report: Once your debts are discharged, check your credit reports to ensure they accurately reflect your debts as discharged in bankruptcy.
4. Financial Rebuilding: Begin the process of rebuilding your credit and establishing a more sustainable financial life.

Please note: Laws and procedures may vary by jurisdiction and are subject to change. Always consult with legal professionals for advice tailored to your specific circumstances.

Can I File Personal Bankruptcy With No Money?

Filing for personal bankruptcy with little or no money is challenging but not impossible. Here’s how you might go about it:

Filing Fees:

Both Chapter 7 and Chapter 13 bankruptcies come with filing fees. As of 2023, these are $335 for Chapter 7 and $310 for Chapter 13 in the United States. However, you may apply for a fee waiver in the case of Chapter 7 if your income is less than 150% of the federal poverty level, and you can demonstrate that you can’t afford the fee. Chapter 13 does not offer a fee waiver, but the fee can sometimes be paid in installments.

Legal Representation:

Attorney’s fees can be another significant cost. Some options to reduce or eliminate this cost include:

1. Pro Bono Services: Some attorneys offer free services for low-income clients. Legal aid societies may also assist with bankruptcy filings.
2. Self-Representation: It’s possible to file “pro se,” or without a lawyer, although this isn’t advisable due to the complexity of bankruptcy law. If you go this route, make use of free resources and clinics that offer guidance to pro se filers.

Other Costs:

Credit counseling and debtor education courses are required for all individual bankruptcy filers. These usually have modest fees, but free or discounted services may be available for low-income individuals.

Fees by Type of Bankruptcy:

Chapter 7 is often less expensive and quicker than Chapter 13, making it more suitable for those with very limited funds. However, you must qualify through the means test, which evaluates your income and expenses.

Tips:

1. Gather Documentation: Even with limited funds, you’ll still need to provide extensive financial documentation. Collect all records of your income, debts, and assets.
2. Be Transparent: Financial hardship may grant you some leniency or assistance in the process, but you must be honest and transparent about your financial situation. Falsifying information could lead to your case being dismissed or, worse, allegations of fraud.
3. Consult Free Resources: Many courts offer free clinics or guidance booklets for those filing without an attorney. Utilize these resources to understand the process and forms needed.

Filing for bankruptcy with limited resources is difficult but can be done. Due to the complexities and long-term impact, consult professionals and seek out resources tailored to low-income individuals to assist you in this serious financial step.

Types of Debt That Can Not Be Declared in Personal Bankruptcy

While personal bankruptcy can help discharge various types of unsecured debt, there are some debts that generally cannot be discharged through this process. Here are some types of debt that are typically not dischargeable under U.S. bankruptcy law, although exceptions may exist:

1. Student Loans: Except in rare circumstances where “undue hardship” can be proven, student loans are generally not dischargeable.
2. Alimony and Child Support: These domestic support obligations remain enforceable even after bankruptcy.
3. Certain Tax Debts: Most recent back taxes, as well as other tax penalties and government fines, are not dischargeable. Older tax debt may be dischargeable under specific conditions.
4. Criminal Fines and Restitution: Penalties or fines for breaking the law cannot be discharged in bankruptcy.
5. Personal Injury Debts: Debts resulting from causing death or injury while driving under the influence are generally not dischargeable.
6. Secured Debts: While the lien on the property may be removed, the actual debt often remains and the creditor can still seize the property.
7. Court Fees and Penalties: Financial penalties imposed by a court for any civil or criminal cases are typically not dischargeable.
8. Condominium or Cooperative Housing Fees: These fees will continue to accrue after the bankruptcy filing and are not dischargeable.
9. Debts Not Listed in Bankruptcy Filings: Any debts that are not included in your bankruptcy papers will not be discharged.
10. Debts from Fraud or Theft: Any debts incurred through fraudulent means or theft may be ruled non-dischargeable if the creditor successfully petitions the court.
11. Luxury Goods and Cash Advances: Debts from luxury goods or cash advances taken shortly before filing for bankruptcy might not be dischargeable.
12. Certain Debts in a Prior Bankruptcy: If a debt was ruled non-dischargeable in a previous bankruptcy case, it will remain so in any subsequent filings.
13. Federal Student Loans: Except in rare cases, federal student loans are not dischargeable.

Different rules apply depending on the type of bankruptcy (Chapter 7, Chapter 13, etc.), so it’s crucial to consult a qualified bankruptcy attorney to understand which of your debts may or may not be dischargeable in your specific situation.

What Happens to My Property if I File Personal Bankruptcy?

What happens to your property when you file for personal bankruptcy varies based on the type of bankruptcy you file and the laws of your jurisdiction. Here’s a general overview:

Chapter 7 Bankruptcy:

1. Liquidation: In a Chapter 7 bankruptcy, a trustee is appointed to liquidate your non-exempt assets to pay off creditors.
2. Exemptions: Each state has laws that define what assets are exempt from liquidation. Common exemptions include a certain amount of equity in a primary residence, a basic automobile, and essential personal property like clothing and household goods.
3. Secured Debts: If you have secured debts like a mortgage or car loan and you want to keep the property, you’ll usually need to continue making payments and reaffirm the debt.
4. Retirement Accounts: Most retirement accounts are exempt from liquidation under federal law.
5. Jointly Owned Property: The portion of the property owned by another person may be protected, but specific rules vary by jurisdiction.

Chapter 13 Bankruptcy:

1. Retaining Assets: Unlike Chapter 7, Chapter 13 allows you to keep all your property, both exempt and non-exempt.
2. Repayment Plan: You’ll be put on a court-ordered repayment plan, typically lasting 3-5 years. The value of your non-exempt assets will usually influence the amount you have to repay.
3. Secured Debts: You can include overdue payments on secured debts like mortgages and car loans in the repayment plan and keep the property by making scheduled payments.
4. Property Tax and Alimony: These must usually be paid in full through the repayment plan.

Special Types of Property:

1. Inheritance and Windfalls: If you inherit money or property while in the midst of a bankruptcy proceeding, it may be subject to seizure or affect your repayment plan.
2. Business Assets: If you own a business, the assets could be subject to different rules, particularly if the business is a separate legal entity.

Important Points:

1. Federal vs. State Exemptions: Some states allow you to choose between state and federal exemptions. An attorney can help you decide which is most beneficial.
2. Convert Non-Exempt to Exempt: Before filing, some people convert non-exempt assets into exempt assets, like using cash to pay down a mortgage. This must be done carefully and transparently to avoid allegations of fraud.

Given the complexity and variation in bankruptcy law, consulting with a qualified bankruptcy attorney is strongly recommended to understand how filing will affect your specific property and financial situation.

Alternatives to Declaring Personal Bankruptcy

Declaring personal bankruptcy is a serious decision with long-lasting consequences. If you’re facing overwhelming debt, consider exploring alternative options first. Here’s a list of alternatives along with brief explanations:

Debt Settlement

Explanation: You or a debt settlement company negotiates with your creditors to reduce the amount you owe, usually in exchange for a lump sum payment. Pros: Reduces overall debt. Cons: Credit score impact, potential tax liabilities on forgiven debt, and not all creditors may agree to negotiate.

Debt Management Plan (DMP)

Explanation: A credit counseling agency works with you to create a debt repayment plan. They negotiate lower interest rates and fees with your creditors. Pros: Simplified payments, and reduced interest rates. Cons: Long commitment, fees, and doesn’t reduce principal debt.

Debt Consolidation

Explanation: Combine multiple high-interest debts into a single lower-interest loan. Pros: Easier to manage, lower interest rate. Cons: May extend the repayment period, potential for additional fees, and could require collateral.

Credit Counseling

Explanation: Meet with a credit counselor to assess your financial situation and explore various debt management strategies. Pros: Expert advice, tailored plans. Cons: It may come with fees, and advice alone doesn’t reduce debt.

Negotiating with Creditors Directly

Explanation: Contact your creditors to negotiate lower interest rates, waived fees, or extended payment terms. Pros: You maintain control, and possibly avoid third-party fees. Cons: Time-consuming, stressful, and not guaranteed to work.

Borrowing from Friends or Family

Explanation: Secure a loan from someone you know to pay off debt. Pros: Usually low or no interest, flexible repayment terms. Cons: Potential to strain relationships.

Home Equity Line of Credit (HELOC) or Loan

Explanation: Use your home’s equity to secure a loan or line of credit to pay off debts. Pros: Lower interest rates, potential tax benefits. Cons: Puts your home at risk, fees, and extended repayment period.

401(k) Loans

Explanation: Borrow against your 401(k) to repay debt. Pros: No credit check, low interest. Cons: Risks retirement savings, potential fees, and immediate repayment if you lose your job.

Cutting Expenses and Increasing Income

Explanation: Reduce discretionary spending and find ways to increase your income, such as a second job or freelance work. Pros: Builds good financial habits, no additional debt. Cons: Requires discipline, may not be sufficient for large debts.

Forbearance or Deferment

Explanation: Request a temporary pause or reduction in payments. Pros: Offers short-term relief. Cons: Interest usually continues to accrue, increasing overall debt.

Each of these alternatives has its own pros and cons, and their effectiveness can vary based on your specific financial situation. Consulting with financial advisors or credit counselors can provide you with tailored guidance.

---