The word 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 United States 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.
So what exactly is bankruptcy? Simply put, bankruptcy allows for your debt to be dismissed or reorganized under court oversight. It can be a valuable tool for consumers and businesses that have more debt than they are able to repay. For the purposes of this article, we’ll focus on consumer bankruptcy.
The history of bankruptcy
Financial problems are nothing new. People have had them since the invention of money. If you’ve ever heard of debtor prisons, you understand that debt forgiveness is a fairly new concept. In fact, the first bankruptcy laws in the United States weren’t implemented until 1800 and were based on similar laws in England. But it wasn’t until 1841 that laws allowing voluntary bankruptcy were created, forming the basis of our modern-day debtor laws.
From these initial laws stem three primary types of bankruptcies for consumers: Chapter 7, Chapter 11 and Chapter 13. Each one differs from the others, but all provide court-ordered protection from creditors and a plan to give you debt relief. Let’s take a look at what each one does.
What is 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 of their unsecured debt (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.
More about Chapter 7 bankruptcy:
- There are limitations per state and your qualification depends on many factors, including 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.
- This filing remains on your credit 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.
What is Chapter 11 bankruptcy?
Chapter 11 is most often used by businesses, but consumers with significantly complicated bankruptcy cases can also file Chapter 11. It is also more expensive than other forms of consumer bankruptcy, but it can be the best option for people with very large debts, both secured and unsecured.
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. If, however, all creditors do not give their approval, a process called a “cram down” can be invoked, allowing the plan to be confirmed by the court despite creditor opposition.
Chapter 11 will remain on your credit report for about seven years from the time it is filed.
What is 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.
Many debt counselors advise against Chapter 13 because falling behind on the monthly payments can result in your bankruptcy being dismissed. If that happens, you lose court protection for your debts and will once again owe them in full.
It’s also important to note that roughly 70 percent of Chapter 13 cases end up unsuccessful and in dismissal because the debtor’s financial circumstances turned dramatically worse during the repayment period.
Keep in mind that Chapter 13 bankruptcies can be converted to Chapter 7 because of unforeseen circumstances such as unemployment or long-term disability.
Like Chapter 11, Chapter 13 will remain on your credit report for about seven years from the time you file.
How does bankruptcy work?
Unlike some other debt relief options, you don’t have to wait until you fall seriously behind on your payments to seek bankruptcy protection. That said, it’s typically best to use bankruptcy as a last resort because it impacts your credit scores more significantly than options such as a debt management plan or debt settlement program.
But there are circumstances when bankruptcy is the best choice. If you’re considering it, you’ll want to talk to experts who can help you sort out what to consider. At Resolve, we believe Chapter 7 is the best option if you qualify, and we rarely recommend Chapter 11 or Chapter 13.
Once you decide bankruptcy is the right option for you, you’ll get immediate relief from any debt collectors who are hounding you, but expect the rest of the process to take some time. Chapter 7 is typically completed within 90 days from the time you file. Chapter 13 can take much longer, with repayment plans taking three to five years, depending on the amount of debt you have. Chapter 11 is more difficult to nail down and depends on the complexity of the case.
Whichever solution you think may be best for you, it’s a good idea to talk to an attorney. Yes, you can file Chapter 7 or Chapter 13 on your own, but the process isn’t simple and the attorney fees can save you a lot of the difficulty and frustration you are likely to encounter otherwise. Also keep in mind that many attorneys can wrap their costs into your settlement, meaning you’ll pay their fees over time as you make payments on your plan.
How much your costs will be depends on where you live and the type of bankruptcy protection you file for, but the national average is $1,800 for Chapter 7 and $3,000 for Chapter 13. As the saying goes, if you have to ask about the costs for filing Chapter 11, you probably can’t afford it.
The biggest impact from bankruptcy is the fallout on your credit. Sure, you get the relief from your debt, but you’re not going to be able to successfully apply for new credit for some time. You might get a secured credit card before your bankruptcy is discharged, but expect to wait a couple of years before you can qualify for an unsecured card, a car or home loan.
Also be aware that bankruptcy doesn’t include all of your debts. Student loan debt, many secured loans like for your home or car, child support and alimony, legal fines, tax debts and any debt stemming from your negligence, such as drunken driving, are some that are excluded.
How Resolve can help
If you’re seeking debt relief and considering bankruptcy, Resolve is here to help. We can assess your situation and show you your options for paying off your debt, including filing for bankruptcy, if appropriate. Our Resolve platform and debt guidance are free. You can review and compare debt relief paths and ask our experts questions without cost. If you then decide to work with one of our Resolve Network Partners, we will inform you of the fee for that service.
While we currently do not offer partnerships with bankruptcy attorneys, we can connect you with licensed legal professionals in your state who offer a no-cost initial consultation. We can also help you understand what bankruptcy would mean for your financial circumstances.