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How to know if bankruptcy is right for you

The thought of bankruptcy can strike financial fear into a lot of people. It comes with a good bit of stigma, and most of us would prefer to avoid it. But the truth is: Hundreds of thousands of people in the U.S. file for bankruptcy protection every year. For many, debt relief under court protection can be the tool they need to get their financial lives back on track.

Here’s what you need to know about the different types of bankruptcies, how each works, when you should file and how much bankruptcy costs.

90 Days - 5 Years

Plan Length

Unsecured Debts

Type of Debts Discharged

$1,800 - $3,000

Fee (on Average)

PROS

No impact to your taxes.
Usually this is a lower cost option than other debt relief options; especially Chapter 7 bankruptcy.
Chapter 7 is the fastest way out of debt. You can start rebuilding your credit right away.
You’re under court protection, which eliminates judgments, liens and wage garnishments, and stops all collections, even a foreclosure.

CONS

For a time, bankruptcy impacts your credit. Chapter 7 bankruptcy stays on your credit report for 10 years and Chapter 13 for seven years.
Historically, most people who file Chapter 13 risk not completing it, which wastes money and time.
It may impact your immediate financial goals. Chapter 13 takes three to five years to complete.
It’s public record. This can impact people who work in financial services or a field that requires a very clean background check.

What is bankruptcy?

Bankruptcy laws give those who have more debt than they are able to repay a way to get a fresh start. Depending on the type of bankruptcy filed (Chapter 7, 11 or 13), consumers can gain court-ordered protection from creditors, discharge unsecured debts entirely or enter into an organized repayment plan.

What are the types of bankruptcies?

There are different types of bankruptcy filings — Chapter 7, Chapter 11 and Chapter 13 — and pros and cons within each. At Resolve, we believe Chapter 7 is the best option if you qualify and if it fits your financial situation.

Chapter 7 Bankruptcy

Chapter 7 is one of the most common forms of bankruptcy that consumers can file, and it can be the best option if you qualify. That’s because there’s no repayment plan under Chapter 7.

It allows consumers to eliminate all their unsecured debts (and some secured), giving them a clean financial slate in as little as 90 days. Your secured debt, such as for your home or automobiles, can be affected by a Chapter 7 filing, but to what degree depends on the state where you live.

There are limitations per state and your qualification depends on many factors, including combined household income and the number of people in your household.
If you qualify, ultimately you can discharge all of your unsecured debt and owe nothing after the process is complete, which typically takes 90 days.
This filing remains on your credit reports for 10 years.
Once you’ve discharged your unsecured debt, you can get new credit card offers within a few months, qualify for a home loan in two to three years, and apply for federal student loans after three years.
You can’t file Chapter 7 again for eight years.

Chapter 11 Bankruptcy

Unlike Chapter 7, which allows consumers to wipe away their debts, Chapter 11 requires a repayment plan for those debts. That plan must be approved by a court, the plan must be outlined in full and creditors must sign off on it.

Chapter 11 bankruptcy is most often filed by businesses, and allows a business or individual to reorganize their debt and pay off both secured and unsecured debts over time.
A court must approve a repayment plan and disclosure statement describing the plan for repayment.
Creditors must approve the plan after it is approved by the court.
If creditors do not approve the plan, a process called “cram down” can be invoked, allowing plan confirmation despite any creditors being opposed.
Chapter 11 cases often involve larger debt than Chapter 7 or 13 cases, are typically more complex and are often more costly.

Chapter 13 Bankruptcy

Like Chapter 11 bankruptcy, Chapter 13 involves the creation of an organized repayment plan. Once your plan is approved, your case is turned over to a trustee, who is responsible for ensuring that you make your regularly scheduled payments, usually over a three- to five-year term. Those payments are then distributed to your creditors to pay off the debt included in your bankruptcy.

Chapter 13 is an organized repayment of debts that the courts sponsor.
When filing Chapter 13, a trustee will be responsible for your financial life for up to five years. They generate a monthly payment to themselves and a preset amount to your creditors, which is sometimes the full amount owed, but often less than your total balance.
If you miss one payment, the plan can be canceled and you will have to start over with a different solution.
Typically more than 70% of cases don’t complete the plan because circumstances can drastically change over a five-year period and emergencies can surface.
Sometimes you can convert a Chapter 13 into a Chapter 7. You may also have a shorter waiting period for filing a Chapter 13 after having previously filed a Chapter 7. Consult with a bankruptcy attorney about your situation for more information.

Related Articles:

What’s the difference between Chapter 7 and Chapter 13?

What’s the difference between Chapter 7 and Chapter 11?

When should you file for bankruptcy?

You should file for bankruptcy when you feel you’ve exhausted other options for resolving your debt and you need to start with a clean slate. This is not a decision to take lightly as it impacts your credit for seven to 10 years. However, there are times when this is truly the best step and is worth the effort to get a fresh start with your finances. At Resolve, we believe Chapter 7 is the best option where viable, and we rarely recommend Chapter 11 or Chapter 13.

Bankruptcy FAQs

How long does bankruptcy take?
Chapter 7 is typically completed within 90 days of filing; Chapter 13 plans run for three or five years and the plan for Chapter 11 depends on the complexity of the case.
Can I file bankruptcy on my own?
While it’s possible to file bankruptcy for both Chapter 7 and 13 without a bankruptcy attorney, we don’t recommend it. Most lawyers offer a free consultation.
How much does bankruptcy cost?
The average national cost for Chapter 7 is around $1,800, but this varies by location. While Chapter 13 costs vary, expect to pay at least $3,000. Costs for Chapter 11 only go up from there.
How will bankruptcy impact my credit?
- We won’t sugarcoat it — bankruptcy does have a big, negative impact on your credit for a long time. A bankruptcy remark will show on your credit report for 10 years after filing Chapter 7 and for seven years after filing Chapter 13.
- With Chapter 13 there won’t be any updates to your credit report until you’re done with all the payments, which can take up to five years. So, it’s unlikely you’ll be able to begin to rebuild your credit until it’s complete.
- A Chapter 7 discharge typically takes 90 days at most, you can start rebuilding credit immediately.
How does bankruptcy impact my home?
While Chapter 11 and Chapter 13 typically allow you to keep your home, the state you live in determines the amount of your home equity that is protected in a Chapter 7. Some states protect the entire value of your home and others protect very little. If you meet your state’s homestead/equity exemptions, you would continue to pay your mortgage and keep your home.
What happens to my car in bankruptcy?
Typically, you can keep your vehicles in a Chapter 11 or Chapter 13 bankruptcy. In a Chapter 7 bankruptcy, if you’re still paying on your car loan, you can reconfirm the loan and continue to drive the vehicle. If you continue to make regular payments, you can eventually own your car. You could also use the Chapter 7 process to shed your loan obligation on an underwater car loan. If you own your car(s) outright, there are exemption limits in each state that will protect your vehicle.
When will I be able to get a credit card, loan, car and/or mortgage after bankruptcy?
- With Chapter 7, you can apply for credit cards, loans and car loans right after discharging debts; however, the rates may not be ideal. You can apply for a mortgage two to three years after discharging as well.
- You typically cannot get new credit approved while you are in Chapter 13, which generally runs for five years.
- Some businesses filing for Chapter 11 protection may receive approval for new lines of credit before discharge, but it is unlikely that individuals would be.
If Chapter 7 bankruptcy is the right option for me, how soon can I file?
You can file Chapter 7 right away, which is especially useful if you’re already involved with legal collections, or have been struggling under the weight of overwhelming debt for too long.

Helpful Tools

Find a bankruptcy attorney — Use this search engine to find a bankruptcy attorney near you.

Bankruptcy forms — Access a variety of forms associated with stages of bankruptcy proceedings.

Assess your debt calculator — Helps you answer the question, “Do I have too much debt?”

Credit card payment calculator — Discover how long it will take to pay off your current credit card balance.

Debt management calculator — Calculate the savings you may get on your unsecured debt with a Debt Management Plan.

Debt consolidation calculator — Assess if debt consolidation is a viable option for you.

How Resolve can help

While the tools listed above can help you explore your options for getting out of debt, you may find it challenging to determine the best course of action for your situation. That’s where Resolve comes in.

Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.

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