Bankruptcy

Bankruptcy FAQ: Should You File?

By Cara O'Neill, Attorney
Look for your question in our FAQ section below.

Getting to wipe out debt and start fresh is a great benefit of filing for bankruptcy. But, even though it can help you get back on your feet, it can have serious—and irreversible—consequences. If you suspect that it’s critical to know what will happen before you proceed, you’re right.

Will you lose some of your property? Will bankruptcy wipe out all of your debt?

You’ll have a better idea after reviewing the bankruptcy questions and answers below. Click on a question or scroll to the answer directly.

And More

Who can file for bankruptcy?

Almost any person or business can file for bankruptcy.

An eligible bankruptcy filer must have a permanent residence (domicile), own property, or have a place of business located in the United States. The filer must also complete a financial counseling course (although some filers are exempt from this requirement). U.S. citizenship and insolvency are not prerequisites of a bankruptcy filing.

It’s important to recognize that being eligible to file for bankruptcy does not automatically mean that the filer can proceed under a particular bankruptcy chapter, or will qualify to receive a discharge (the right to have certain debts wiped out). These issues require separate analysis. If you’re unclear whether you’re qualified to file for bankruptcy, you should consult with an attorney.

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Which bankruptcy chapter should I file?

Most individuals file Chapter 7 or Chapter 13 bankruptcy. The chapter you choose will depend on your particular needs and financial qualifications.

Chapter 7 bankruptcy quickly discharges (wipes out) certain types of debt, such as credit card balances, medical bills, and personal loans. Although you won’t need to pay into a repayment plan, you might have to give up some of your property. Also, Chapter 7 bankruptcy doesn’t help you keep a house or car if you’re behind on payments. Your income must be low enough to pass the “means test” to qualify for a Chapter 7 debt discharge.

Chapter 13 bankruptcy is a better choice if you want to keep your house or car and need to bring your loan current or pay off nondischargeable debt, such as child or spousal support, or past-due income tax. Although you can keep all of your property, you must have enough income to fund a three- to five-year repayment plan. Additionally, your total debt cannot exceed maximum limits for secured debt, such as vehicle and real estate loans, and unsecured debt, such as credit card and utility bills (you’ll want to check for current limits), otherwise, you need to file a Chapter 11 individual bankruptcy. Finally, keeping property comes at a cost—you must pay for nonexempt (property you aren’t entitled to protect under your state’s exemption laws) in the repayment plan.

Not only are the facts of your case unique, correctly applying bankruptcy law can be tricky. If you’re not sure which chapter best meets your needs, you can learn more by reading Choosing the Right Type of Bankruptcy: Chapter 7 or 13 or by consulting with a bankruptcy lawyer.

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Do I have to have a minimum amount of debt to file for bankruptcy?

No. It isn’t necessary to owe a certain amount of debt—or even be insolvent—before filing for bankruptcy. Every financial situation is different, and the amount of debt that will cause one person financial distress might not be problematic for someone else.

For most people, the ability to repay a creditor depends on the percentage of income needed for basic living expenses. For instance, someone who is living paycheck to paycheck without a foreseeable increase in income might not be able to pay back a small debt. For that person, bankruptcy might make sense. (Keep in mind that if you’re “judgment proof,” meaning that you don’t have income or property that a creditor could collect from you, filing for bankruptcy might not be necessary.)

Here are a few factors to consider before filing with minimal debt:

  • How much debt do you owe?
  • Will bankruptcy discharge (wipe out) the type of debt you owe?
  • How long will it take you to repay your debt?
  • Are you facing a lawsuit, wage garnishment, or another type of collection activity?
  • How much will you spend in attorneys’ fees and filing fees?

It’s important to remember that wiping out debt comes with serious long-term consequences. Bankruptcy will affect your credit standing (and remain on your credit report) for up to ten years. Also, some courts frown on filing for bankruptcy when you have minimal debt. A local bankruptcy lawyer can quickly review your case and advise you of the best course of action—often without charging you a consultation fee.

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How often can I file for bankruptcy?

An individual or business can file for bankruptcy at any time. However, to be eligible to receive a discharge (the order that eliminates qualifying debt), a certain amount of time must elapse between filings.

Here’s how filing multiple bankruptcies works (this applies to individuals only—businesses can only receive a debt discharge in Chapter 11 bankruptcy):

  • If you previously received a Chapter 7 discharge, you’re eligible to receive another Chapter 7 discharge eight years after the filing, or a Chapter 13 discharge four years after the filing.
  • If you previously received a Chapter 13 discharge, you’re eligible to receive a Chapter 7 discharge six years after the filing, or another Chapter 13 discharge two years after the filing.

A filer who is ineligible for a discharge can take advantage of another benefit of bankruptcy: Its ability to stop collection activity in its tracks.

For instance, suppose you found yourself buried deep in debt shortly after completing a prior bankruptcy, or you were left with a lot of nondischargeable debt after filing a Chapter 7 case. You could stop a creditor from emptying your bank account (bank levy) or deducting money from your paycheck (wage garnishment) by filing for Chapter 13 bankruptcy. Even though the obligation wouldn’t be wiped out, the collection activity would stop (although you might have to ask the court to keep the automatic stay—the order that stops collection actions—in place), and the Chapter 13 repayment plan would give you three to five years to pay off the debt.

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Do I have to file bankruptcy on all the accounts I owe, or can I keep some?

It’s common to want to retain a credit account—such as a major credit card used for business travel or a pet insurance card that covers veterinarian bills—when filing for bankruptcy. The reason that you might want to omit a debt doesn’t matter, however, because the rule is clear—you must list all creditors that you owe money to in your bankruptcy petition, without exception. In fact, if you fail to list a creditor, the court might not discharge (wipe out) the debt in your bankruptcy. You’ll likely remain responsible for paying the debt after your case is over.

It might help to understand that bankruptcy does more than give filers a fresh financial start. Bankruptcy serves an additional purpose, as well. Bankruptcy law protects the rights of creditors by ensuring that all creditors receive an appropriate distribution of any funds available to pay the filer’s debt.

For instance, suppose that a filer is in a Chapter 7 bankruptcy, and the bankruptcy trustee (the court-appointed individual tasked with overseeing the case) finds nonexempt property (property that the filer cannot keep under state exemption laws) worth $3,000. It’s the trustee’s job to sell the property for the benefit of the creditors. The trustee will review the list of creditors reported on official Schedule E/F: Creditors Who Have Unsecured Claims and disperse the funds accordingly. If you omit a creditor, the creditor won’t receive a share of the funds that it would otherwise be entitled to receive.

Additionally, some filers might be tempted to leave off a creditor that the filer defrauded in some way. Regardless of the reason for the omission, understand that the bankruptcy process looks at your entire financial situation—not just a problematic portion you’d like the court to resolve.

(Find out more in Do I Have to Include All My Debts in My Bankruptcy?)

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Can I eliminate all of my debts by discharging them in bankruptcy?

It depends. Although bankruptcy efficiently discharges (wipes out) many types of debt, it doesn’t get rid of all obligations. Here are examples of dischargeable debt:

  • credit card balances
  • personal loans, such as payday loans
  • medical bills
  • past-due utility bills
  • book club or gym memberships
  • lease contracts for cars and equipment
  • mortgage or car loans (if the borrower returns the property to the bank), and
  • certain debts owed to the government (other than fines and penalties), such as an unemployment benefit overpayment.

You’ll likely remain responsible for the full amount of the following “nondischargeable debts”:

  • a mortgage or car payment (if the borrower keeps the house or car)
  • domestic support obligations, such as child or spousal support payments
  • old past-due taxes, and
  • student loan obligations.

In rare cases, you might be able to get rid of some of the debt listed above. For instance, if your income tax debt is several years old (and you meet other criteria), it might be dischargeable. Filers who prove that, due to no fault of their own, it’s unlikely that they’ll ever be able to pay student loan debt can discharge student loans.

Additionally, different bankruptcy chapters wipe out particular types of debt more readily than others. You’ll want to understand the relief afforded by both Chapter 7 bankruptcy and Chapter 13 bankruptcy, and find out whether you meet qualification requirements, too. To learn about the options available to you, consult with a bankruptcy attorney.

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Will I have to pay any of my debts after bankruptcy?

Possibly. You could find yourself left with debt after your case is over because not all obligations go away in bankruptcy. Here’s a list of nondischargeable debts (debts that don’t get wiped out) that you’ll remain responsible for after a Chapter 7 case:

  • overdue child support
  • alimony or spousal support
  • student loan debt
  • tax debt (although you can sometimes wipe out old taxes), and
  • payments related to injuries you inflicted on another person while driving intoxicated.

(You can find out more about debt that will remain with you after your bankruptcy by reading Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.)

It works differently in a Chapter 13 bankruptcy. Except for your student loan, you’ll have to pay the entire balance of your nondischargeable debt in your Chapter 13 repayment plan. Your student loan is an exception because it’s considered a long-term debt, meaning that when you took out the loan, the creditor expected you to make payments over an extended period. Because long-term debt (such as a mortgage payment) is exempt from the full payment requirement, you’ll resume paying your usual monthly payment (or the payment amount currently due) after completing your bankruptcy.

Be aware that if a creditor believes that you’ve committed fraud, the creditor can ask the court for an order finding that a normally dischargeable debt—such as a credit card balance or utility bill—is nondischargeable in your particular bankruptcy case. For instance, if a creditor successfully proves that you lied about your income on a credit application, or that you defrauded the utility company by rewiring the electric meter, you might remain responsible for the debt.

(Read more in What Happens to Debt Resulting from Fraud in Bankruptcy?)

Determining whether your debt will survive your bankruptcy case can be tricky. For further help, take advantage of a free consultation with a bankruptcy lawyer.

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If I file for bankruptcy, will the cosigner of my loan still have to pay?

In most cases, yes. Someone who co-signs on a loan or credit account agrees to be contractually liable for the debt if you don’t pay it, and the responsibility doesn’t change if you file for bankruptcy. In other words, if you receive a discharge (the order that wipes out qualifying debt) for the debt in a Chapter 7 case, your obligation to pay it will go away while leaving your cosigner’s responsibility in place (unless the cosigner files for bankruptcy, too). The creditor can still pursue the cosigner for payment.

You can protect a cosigner by filing for Chapter 13 bankruptcy. For instance, if the co-signed debt is a car loan, you can pay the entire balance over the course of your three- to five-year repayment plan.

To find out more about protecting a cosigner, you should consult with a local bankruptcy attorney.

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What are the differences between secured and unsecured debt?

When a lender makes a large loan—such as for a home or a car—the borrower must put up property (collateral) to guarantee payment of the debt. If the borrower falls behind (defaults) on the payment agreement, the lender can foreclose on the home or repossess the car. A collateralized debt is known as a secured debt.

Stores that sell electronics, furniture, or jewelry often require you to secure credit with the purchased property. If you don’t pay your bill, you’ll have to return your television, earrings, or couch to the store. To find out if you secured your purchase, check the fine print in the credit contract (it might appear on the back of your sales receipt).

An “unsecured” debt is a credit account that the borrower didn’t guarantee with collateral. For instance, if you don’t make your credit card payment, the creditor can’t take back the sporting equipment that you bought the prior month. Instead, the unsecured creditor must file a lawsuit and obtain a court judgment for the amount you owe before it can use specific collection tactics, such as taking money out of your bank account (bank levy) or instructing your employer to deduct money from your paycheck (wage garnishment)

Examples of unsecured debt include:

  • credit card balances
  • medical bills, and
  • personal loans, such as a payday loan or a loan from family or friends.

Be aware that certain creditors—for instance, if you owe taxes, the government—can use collection tools without first getting a court judgment.

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Will bankruptcy stop a lawsuit or wipe out a money judgment against me?

Yes, bankruptcy will stop most collection lawsuits, and, in some cases, help you get rid of any debt liability associated with a money judgment. But, exceptions apply. For more details, read Will Filing for Bankruptcy Stop a Civil Lawsuit or Get Rid of a Court Judgment?

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What can I keep, if anything, if I file for bankruptcy?

When you file for bankruptcy, you are allowed to exempt (keep) property that you’ll need to hold down a job and maintain a household. Your state’s exemption statutes will list the type of assets that you can protect.

Most states allow you to retain the following property:

  • household furnishings, such as a couch, dining room table, and bed
  • household goods, such as cookware, dishes, and towels
  • clothing
  • a modest amount of equity in a vehicle
  • tools needed in your business or trade
  • retirement and pension accounts, and
  • some jewelry.

Your state exemption statute might allow you to keep additional property, such as a certain amount of equity in your primary residence (the home you live in), or your state might have a “wildcard” exemption that allows you to exempt any property of your choosing up to a particular value.

Most people who file for bankruptcy can keep all of their assets. You’ll likely be able to do the same as long as you don’t own the expensive items most frequently lost to bankruptcy, such as a luxury vehicle, a boat, vacation property, or pricey artwork. Even so, it’s important to know what you can and cannot keep before filing. You should expect the court to hold you responsible for any mistake that you make, especially when it involves your property.

If you own anything of value, it’s best to be proactive. An experienced bankruptcy attorney can review your assets and tell you what you can protect before you file for bankruptcy.

(You can find out more by reading If You Declare Personal Bankruptcy, What Can You Keep?)

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Will I lose my home if I file for bankruptcy?

Most people can keep a house in bankruptcy as long as they can meet specific criteria. If you file for Chapter 7 bankruptcy, here are the factors that you’ll need to meet:

  • You’re current on your house payment.
  • You can continue making your house payment after your bankruptcy.
  • You can exempt (protect) the equity in your home under your state’s exemption statute.

If you aren’t sure what it means to exempt property, here are how bankruptcy exemptions work.

You’re allowed to keep a certain amount of assets when you file for bankruptcy. The type and value of property you can protect will vary depending on your state. Some states allow you to exempt the equity in your house up to a particular dollar amount.

If your home has nonexempt equity—equity you’re not entitled to keep—the bankruptcy trustee (the court-appointed official that oversees your case) will sell your home for the benefit of your creditors. You can find out how much equity you can exempt in your state’s exemption statutes.

Filing for Chapter 13 bankruptcy provides additional ways to keep your house—even if you’re behind on your payments or have nonexempt equity in the property. You must prove to the court that you have sufficient monthly income to pay for the following over the course of a three- to five-year repayment plan:

  • your monthly house payment
  • any past-due amount owed, and
  • any portion of equity that you’re not allowed to exempt (up to the amount of your total debt).

Be aware that you’ll likely have to pay an additional amount to other creditors, as well—and the amount could be sizeable. For instance, if your house is worth a lot, you might have to repay all of your creditors in what is known as a 100% plan. Paying into a 100% plan is unusual, however, and many people pay significantly less than what they owe. To learn more, read Secured Claims in Chapter 13 Bankruptcy: Can I Catch Up on My House or Car Payment?

Bankruptcy law can be complicated, and you can’t count on the court or the trustee to help you along the way. If your goal is to protect your home, it’s best to consult with an experienced bankruptcy attorney before proceeding with either chapter.

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Will I lose my retirement account or Social Security payment if I file for bankruptcy?

One of the benefits of bankruptcy is that you don’t lose everything. You’re allowed to keep certain assets, such as your retirement savings and benefit payments. But the general rule has limitations. Here’s how it works.

If your retirement account is an ERISA-qualified pension plan—which most are—you can exempt (protect) all of the account funds. ERISA-qualified plans include:

  • 401(k)s
  • 403(b)s
  • IRAs (Roth, SEP, and SIMPLE)
  • Keoghs
  • some profit-sharing plans, and
  • defined benefit plans.

However, if you have a traditional or Roth IRA, your exemption amount will be limited to $1,283,025 per person (this amount will adjust in 2019). Also, once you receive a distribution, the funds take on a different character. Retirement distributions—such as your monthly pension payment—must be included in your income and therefore, might affect your ability to qualify for bankruptcy. You’ll have to include such funds as income on the Chapter 7 bankruptcy means test (the test that determines whether your income is low enough to qualify for Chapter 7 bankruptcy). Additionally, once you receive the distribution, it becomes a cash asset that’s no different than the money in your bank account, so you’ll need a separate exemption to protect it just as you would other money that is immediately available to you.

Like your qualifying retirement account, your Social Security benefits are exempt from bankruptcy. By contrast, the funds you receive each month are exempt, as well—and even better yet, you won’t include monthly Social Security benefits in your means test calculation. But there’s still a catch. You must be able to prove that the funds are indeed Social Security funds.

If you comingle (mix) your Social Security payment in an account that you use to deposit money from other sources, the Social Security funds won’t be protected. For instance, suppose that you put your $500 Social Security payment into the checking account you use to pay for food and other necessities, and you deposit your spouse’s paycheck in that same account. If the account balance is $3,000 when you file for bankruptcy, the court won’t be able to tell how much of it, if any, is Social Security funds. For all the court knows, the entire balance might be your spouse’s wages. If you want to prevent this problem from occurring, the best course of action is to maintain the funds in a separate bank account. That way you’ll be able to keep your benefits in bankruptcy, and even protect the funds from other collecting creditors, too.

(Find out more in Bankruptcy Planning for Senior Citizens.)

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How is an inheritance treated in a bankruptcy case?

When you file for bankruptcy, you agree that in exchange for wiping out (discharging) your qualifying debt, your property becomes part of what’s known as the bankruptcy “estate.” In other words, you no longer own the property.

That doesn’t mean that you lose everything, however. You can exempt (keep) a certain amount of property that you need to work and live. The bankruptcy trustee—the court-appointed official charged with overseeing your case—divides the remaining property among your creditors, including anything that you might have received through inheritance. So if you don’t want to lose your inheritance, consult with an attorney before filing for bankruptcy.

Also, if your ailing aunt might pass away and leave you something in her will, it’s probably best to hold off from filing. In a few situations, even property that you acquire after you file for bankruptcy can become part of the bankruptcy estate—and an inheritance falls into that category. It doesn’t matter whether you file for Chapter 7 or Chapter 13 bankruptcy, you must give the trustee anything that you receive due to the death of another person during the 180-day period following your filing date.

Understand, however, that each person’s financial situation is different. A bankruptcy attorney can explain the best options for you, and in many cases, the initial consultation will be free.

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Where to Find More

If you think that filing for bankruptcy will work for you, you’ll want to know what comes next. Get ahead of the process by reading:

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