Bankruptcy: 12 Things You Need To Know

What you need to know before you file bankruptcy


Photo Credit: Stuart Miles /

1. The Difference Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

If you are an individual filing for bankruptcy (in other words, you are filing bankruptcy on your own behalf, not on behalf of a business you own), you have two filing options. You can file a Chapter 7, which allows you to walk away from debts entirely. This option is used by those whose debts are so high or income so low that after basic expenses they don’t have extra income for a payment plan. You can also file a Chapter 13, which allows you to draft a plan to repay all or part of the debts over three to five years.

2. You Will Not Lose Your Assets

Filing bankruptcy, whether a Chapter 7 or a Chapter 13, will not force you to give up all your possessions. You keep your personal property, such as clothes, electronics, household furnishings and other exempt assets. In some cases, you might even be able to retain larger items like your house and cars during bankruptcy. These exceptions depend on your state laws, the type of bankruptcy you file, and your financial situation.

3. Your Assets are Important in Determining Which Bankruptcy Option to File

If you were out of work and behind on making your house payments, but can now meet your monthly mortgage obligations, then a Chapter 13 might be your best option. If you don’t own a home, but are struggling with medical bills, then Chapter 7 might be a better choice. The best thing to do is write down the assets that are important to you. When you talk with an attorney, go through the list and find out how both a Chapter 7 and a Chapter 13 bankruptcy would impact each item.

4. You Have to Qualify for a Chapter 7 Bankruptcy

Before you can file for Chapter 7 bankruptcy, you have to show proof that you are unable to repay your debts. This is done though your proof of income and expenses.

5. Where You Live Matters

When it comes to which assets you can keep when filing bankruptcy, rules vary widely by state. Income and expense limits used for determining whether you qualify for a Chapter 7 bankruptcy will also vary by location.

6. Bankruptcy Should Only Be Filed as the Result of Major Life Events

People should only turn to bankruptcy as a solution when they have had major life events that significantly reduced their income, increase their bills or both. Such events can include divorce, unemployment and crippling medical bills.

7. Bankruptcy will Cost

Total costs of filing for bankruptcy will vary depending on your attorney and location. But you should know that a Chapter 7 bankruptcy can run $1,500 to $2,500, while a Chapter 13 bankruptcy can run $2,000 to $4,000. With a Chapter 13 bankruptcy, you can include bankruptcy costs in your plan and pay them over three to five years. With Chapter 7 bankruptcy, that’s not an option.

8. Bankruptcy Goes on Your Credit History

A bankruptcy will stay on your credit history for approximately 7 – 10 years. The good news is, however, the older that bankruptcy is, the less power it has to scare lenders and impact your credit score. Most people can rebuild credit much sooner than this.

9. It May Not Actually Affect Your Credit

While filing for bankruptcy will show on your credit history, it may not have as much impact on your credit. For example, if you’ve had financial problems such as chronic late and missed payments, charge-offs, etc., you might not notice much of a change in your score at all. A lot depends on your credit activity before filing.

10. Bankruptcy is Public Record

If you file, Chapter 7 or Chapter 13, it is a matter of public record. The days of posting bankruptcies in the local newspapers are long gone, however, because this information is public record, it can still be accessed if taken the time to look for it.

11. Bankruptcy Doesn’t Protect Joint Account Holders

A bankruptcy dissolves your obligation to a creditor. It will not dissolve anyone else’s if they happen to hold responsibility for your debts. This can affect joint account holders or co-signers. Your bankruptcy makes that bill his or hers alone. This happens most often in divorces. If possible, pay off bills or have the obligations transferred into the name of one party or the other before finalizing a divorce.

12. You Will Be Required to Attend a Class on Bankruptcy

Before you can file a Chapter 7 or Chapter 13, you will be required to take a 90-minute credit counseling class. You will also have to take a second, two-hour class before your bankruptcy can be finalized. These classes are available in person, by phone or online and should cost no more than $50 per class. If you are receiving free or discounted legal services, or you’re living on Social Security disability payments, you can have the fees waived.