More than one million people in the country file for bankruptcy every year. If you are overwhelmed with debt and continually being harassed by creditors with no hope of ever paying them, it also might be the answer for you. Ask yourself a few questions and then decide.
1) Will filing for bankruptcy stop creditors from calling me?
Yes. When you file your bankruptcy petition, an automatic stay is placed on all collection action by all creditors. In order to pursue collection, creditors must petition the bankruptcy court for the stay to be lifted. This rarely happens.
2) What is Chapter 7 Bankruptcy?
This is liquidation bankruptcy. If you have very few assets, not much income and your debts are primarily unsecured, such as medical bills and credit card debt, Chapter 7 will help. Your debts will be discharged at the end of the bankruptcy, meaning you will no longer owe them.
If your debts are primarily back taxes, child or spousal support or student loans, Chapter 7 will not help. Those are not dischargeable and you will still owe them.
3) What about Chapter 13 Bankruptcy?
Chapter 13 is a reorganization plan. For example, if you are behind in mortgage payments and want to keep your house, and have enough income to put together a payment plan for all creditors, this will work for you. You repay your creditors over a three to five year period of time. At the end, remaining debt is discharged.
4) What is the “means test?”
The means test compares your income with others in your state and your ability to pay your creditors. If you earn more than the median income for your state, you will not be able to file under Chapter 7. Chapter 13 may still be an option for you.
5) Am I required to have credit counseling before filing?
You must receive credit counseling from an agency approved by the court and file a certificate of completion with the Bankruptcy Court. The counseling only takes a few hours and can even be done on the phone.
6) How much will bankruptcy cost?
Costs vary by state. Court filing fees are generally a few hundred dollars. It is possible to have the court waive the filing fee in hardship cases or allow you to pay it in installments. Attorney’s fees vary, but you will usually be required to pay them prior to filing. Your attorney will explain this to you in detail.
7) How will bankruptcy affect my credit?
A bankruptcy will stay on your credit report for 7 to 10 years. Your score will drop but there are ways you can begin rebuilding your credit starting the day after your debts are discharged.
Stephen Burton has served as an attorney for bankruptcy trustees, taught bankruptcy at the National Business Institute and practiced before the bankruptcy courts. He regularly attends continuing education classes. As a consequence, virtually every case he files is successful.