FAQ

What is Bankruptcy?

Bankruptcy is a federal debt relief process created by the U.S. Congress to assist individuals and businesses facing financial hardship. Authorized by the U.S. Constitution, which grants Congress the power to establish uniform bankruptcy laws, this program operates under consistent federal statutes, rules, and procedures across the United States and its territories. It provides structured options for managing or eliminating debt to help people regain financial stability.

What Type of Relief Does Bankruptcy Provide?

Bankruptcy offers various forms of relief depending on the chapter filed, such as Chapter 7 or Chapter 13 for individuals. Under Chapter 7, often called "liquidation bankruptcy," non-exempt assets may be sold to pay creditors, and most remaining unsecured debts (like credit card balances or medical bills) are discharged, meaning the debtor is no longer legally obligated to pay them. Chapter 13, known as a "reorganization bankruptcy," allows individuals with regular income to create a court-approved repayment plan, typically lasting three to five years, to pay back all or part of their debts while retaining their assets. Both chapters provide an "automatic stay," which halts creditor actions like wage garnishments, foreclosures, or repossessions during the bankruptcy process. This relief aims to give debtors a fresh financial start while ensuring fair treatment for creditors under federal law.

How Do I File for Bankruptcy?

To initiate a bankruptcy case, you must complete standardized Official Bankruptcy Forms and submit them to the U.S. Bankruptcy Court in the district where you have lived for the majority of the past 180 days. These forms are uniform across all U.S. Bankruptcy Courts, ensuring consistency in the filing process. However, each court may have specific local rules or additional forms that govern certain procedural aspects unique to that district. Filing requires careful preparation to ensure compliance with federal and local requirements.

Can I Keep My Property in Bankruptcy?

In a Chapter 7 bankruptcy, you can typically retain all "exempt" assets, which are protected by law. Exemptions vary by state but often include a portion or all of the equity in your primary home, vehicle, household items, clothing, jewelry, retirement accounts, life insurance policies, bank accounts, and certain benefits like Social Security or disability payments. In most cases, these exemptions cover all your possessions. If you have secured debts, such as a mortgage or car loan, and wish to keep the associated property, you must continue making regular payments or enter a reaffirmation agreement with the creditor. Alternatively, you may pay the creditor the current market value of the property to retain it.

Is There a Filing Fee for Bankruptcy?

Filing for bankruptcy involves a court fee, which is $338 for Chapter 7 or $313 for Chapter 13 for individual or joint filings. This fee can be paid at the time of filing or in up to four monthly installments. If your household income is below 150% of the federal poverty guidelines for your family size, you may request a waiver of the Chapter 7 filing fee.

Am I Eligible to File for Bankruptcy?

Most individuals qualify to file under either Chapter 7 or Chapter 13. If your gross household income (including your spouse’s income, unless separated) is at or below the median income for your state and household size, you can file under either chapter based on your preference. If your income exceeds the state median, you may still qualify for Chapter 7 but must pass a "means test" to determine eligibility. Chapter 13 is generally available to anyone with a regular income, regardless of income level.

Do I Need to Complete Credit Counseling Before Filing?

Before filing for bankruptcy, you must complete a session with an approved nonprofit credit counseling agency to explore your financial options. This session, which can be conducted in person, online, or by phone, typically results in an online certificate of completion that must be submitted with your bankruptcy filing. For example, a one-hour online counseling session can be completed for a small fee, such as $10, through providers like MoneySharp.org.

Is a Debtor Education Course Required Before Filing?

You are not required to complete a debtor education course before filing for bankruptcy. However, to receive a final discharge of your debts, you must complete an approved personal financial management course. This course, which takes approximately 1.5 to 2 hours, can be completed online, in person, or by mail. In Chapter 7, it must be completed within 60 days after your meeting of creditors. In Chapter 13, it is typically required near the end of your repayment plan. Approved providers, such as MoneySharp.org, offer this course for a nominal fee, such as $10.

Can I File Bankruptcy Jointly with My Spouse?

Yes, spouses may file a joint bankruptcy petition, even if they are separated, provided the divorce is not finalized. You also have the option to file individually if that better suits your circumstances.

Will I Need to Attend Court Hearings?

In a Chapter 7 bankruptcy, you are unlikely to appear before a judge or in court. However, you must attend a "341(a) meeting" (or "meeting of creditors") with a bankruptcy trustee, typically held 4 to 6 weeks after filing. This brief meeting, lasting about 5 minutes, is usually conducted virtually or by phone, where the trustee asks basic questions about your finances. Creditors rarely attend. In Chapter 7, you should receive your discharge order by mail approximately 60–70 days after this meeting, finalizing your case. In Chapter 13, you must attend the 341(a) meeting and may also need to attend a confirmation hearing to approve your repayment plan.

How Does Bankruptcy Affect My Future Ability to Get Credit or a Mortgage?

Filing for bankruptcy may initially lower your credit score, particularly if you have good credit. However, if your credit is already poor, bankruptcy may have minimal additional impact and can help you rebuild. About 30% of your FICO® score is based on your outstanding debt, so discharging debts through bankruptcy can reduce your debt burden, potentially improving your score over time. To rebuild credit, you can use secured credit cards, make timely payments on reaffirmed debts (like a mortgage or car loan), and maintain stable income and employment. Many people re-establish credit within one to two years. Some lenders may view you as a lower credit risk post-bankruptcy because you’ll have less debt and more disposable income.

Are There Negative Consequences to Filing Bankruptcy?

Bankruptcy laws aim to provide a "fresh start" by reducing or eliminating debts, not to penalize filers. Federal protections ensure you cannot be denied employment, student loans, grants, or licenses solely due to a bankruptcy filing. If your credit is strong, bankruptcy may temporarily harm your score, but if your credit is already damaged, filing can pave the way for improvement. Myths spread by creditors or debt collectors may exaggerate negative impacts, but bankruptcy is designed to alleviate financial distress, not worsen it. Consider the consequences of not filing, such as ongoing creditor harassment or wage garnishments, when weighing your options.

Can Creditors Object to My Bankruptcy Discharge?

Creditors rarely have valid grounds to object to a bankruptcy discharge. Objections are typically only successful if a debt was incurred through fraud, which is uncommon.

Will Bankruptcy Stop Wage Garnishments?

Filing for bankruptcy triggers an "automatic stay," which immediately halts most wage garnishments (except for child support). Creditors must cease garnishment efforts upon your filing, and failure to comply may result in contempt of court. Some employers may require a formal release from the creditor to stop the garnishment.

Can I Add Debts I Forgot to Include After Filing?

You can amend your bankruptcy petition to include debts omitted from the original filing, provided those debts were incurred before the bankruptcy filing date. New debts incurred after filing cannot be added. A one-time amendment fee of $32 applies, regardless of the number of debts added.

How Does Bankruptcy Affect My Mortgage?

When you file for bankruptcy, an automatic stay prevents your mortgage lender from pursuing foreclosure or collection actions without court approval. If you wish to keep your home, you may need to sign a reaffirmation agreement, which excludes the mortgage from your bankruptcy discharge and requires continued payments. If your mortgage is delinquent, the lender may require you to bring payments current or negotiate a modification to reaffirm the loan. You can also make voluntary payments without reaffirming, but this may not guarantee long-term retention of the property.

How Does Bankruptcy Affect My Automobile Loan?

The automatic stay in bankruptcy prevents your vehicle lender from repossessing your car without court permission. You have three options: (1) reaffirm the loan, keep the vehicle, and continue regular payments; (2) redeem the vehicle by paying its current market value, discharging any remaining loan balance; or (3) surrender the vehicle to the lender about 45 days after the meeting of creditors, discharging any further liability on the loan.

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