What is Bankruptcy? A Simple Guide for Consumers
Fact checked by Clayton Hasbrook | Updated on December 14, 2020
If you’re looking at filing for bankruptcy, chances are you’re already pretty stressed out right now. Remember, you’re not by any means alone or the only person struggling.
An estimated 530,000 families in America file for bankruptcy each year due to things like overwhelming bills or medical problems.
We made our guide to walk you through everything, from ‘what is bankruptcy’ to how to file for bankruptcy in Oklahoma.
What Is Bankruptcy?
Beginning with the basics, bankruptcy is a legal process that allows an individual or couple facing overwhelming financial obligations to clear their debts.
It’s often confused with insolvency as the two are so closely related. But insolvency actually refers to the financial state of the individual. If you’re unable to pay debts you owe on time, you would be insolvent.
Once you’re considered insolvent, you would be able to choose to file for bankruptcy or other debt management and consolidation options.
As a legal process, filing for bankruptcy can be quite complicated. There’s a lot of paperwork, asset management, and discussions with creditors to do. This is why so many people opt to use a bankruptcy lawyer to help guide them through it.
Once you’ve been declared bankrupt, you will be considered discharged. This means you’re released from the debt obligations you had prior to filing. You would then be considered solvent again.
In the United States, there are many different types of bankruptcy referred to as chapters. The main three chapters are the ones we’ll cover – Chapter 7, 11, and 13.
Different Types of Bankruptcy
When you file for bankruptcy, you file under a particular code known as a Chapter. A person or organization would file under Chapter 7 to liquidate their assets and repay their debt obligations. A Chapter 7 filing means that all creditors would have to stop their collection efforts immediately.
Individuals filing under Chapter 13 will attempt to restructure their resources and income to pay off their debts. Only individuals and self-employed people can file for Chapter 13, not businesses.
Instead, businesses would file under Chapter 11. This bankruptcy code is only allowed for companies, not individuals. A Chapter 11 filing means that a company will attempt to restructure debts to meet its financial obligations.
For the purposes of this article, we’ll focus on individual bankruptcy processes. Let’s dive into Chapter 7 and Chapter 13 bankruptcy processes.
Chapter 7 Bankruptcy
As we mentioned above a Chapter 7 bankruptcy means you petition the court to ask that unpaid debts are wiped out. Most debts including credit card debt, medical bills, and civil judgments would be wiped out after a Chapter 7 bankruptcy.
While most debts would be wiped out, some are exempt from this. This includes things like student loans, most tax debts, and unpaid child support or alimony. If you have loans outstanding on a car that you own and want to keep, this would also not be wiped.
This bankruptcy code also stops collection agencies chasing after you and stops wage garnishment. The vast majority of people who file for Chapter 7 bankruptcy keep their property.
If you’ve previously filed for a Chapter 7 bankruptcy, you’ll be unable to file again for another 8 years. But you may be able to file a Chapter 13 bankruptcy instead.
Chapter 13 Bankruptcy
Unlike the above code, a Chapter 13 bankruptcy doesn’t clear all your debts. It’s more akin to a debt-consolidation. This means you’d pay back your debts in a manageable way over a period of around three to five years.
Most of the time, what you pay overall is less than what you originally owed. This is because you pay what you can actually afford to. The remaining debt is discharged, or in other words, erased.
Chapter 13 bankruptcies can be a little more complicated as much negotiation with creditors is needed. It’s generally the chosen option for those who want to protect co-debtors or have a property that needs to be protected.
To file for a Chapter 13 bankruptcy, you would have to be employed. This is because you have to agree to a payment plan which creditors believe you can and will stick to.
Other Important Considerations
Bankruptcy isn’t something that should be taken lightly, nor is it a simple solution to falling behind with bills. If you’re seen to be deliberately racking up large credit card debts just before you file for bankruptcy, these won’t be cleared.
In the same vein, debts you amount after filing for bankruptcy would not be erased. It’s also unlikely you’d be able to hold onto valuable assets such as a vacation home, expensive jewelry, or a motorhome.
As we mentioned above, you may only get a Chapter 7 discharge once every 8 years. But any bankruptcy discharge will stay on your credit report for 10 years.
It’s also important to remember that bankruptcy isn’t always the only option. There are many non-bankruptcy alternatives. These include things like negotiating with creditors or consolidation loans.
These options are best advised by a bankruptcy lawyer who knows your individual circumstances. They can help you plan out the best course of action to resolve your debts.
How Much Does Bankruptcy Cost?
There are several different fees debtors may be required to pay. This is unless they fall below a certain level of means to do so, then they would be exempt.
For the vast majority of those filing, they’d be liable to pay a $335 filing fee for Chapter 7 or a $310 filing fee for Chapter 13. As part of the bankruptcy process, both filings would require you to undertake a pre and post-bankruptcy course which is around $10 to $20 dollars each.
Get Bankruptcy Advice
We hope this guide has helped you and you can now answer the question what is bankruptcy with confidence. Whatever your financial situation, remember you’re not alone and there are experts who can help.
If you’re looking for advice or a bankruptcy lawyer in Oklahoma City, please get in touch for a free bankruptcy consultation.