If you’re falling behind on your bills, you might be tempted to pull a Michael Scott from The Office, step out into a room full of people and shout: “I DECLARE BANKRUPTCY!”
Well, you can’t exactly just say the word bankruptcy and expect anything to happen. Like any legal matter, filing for bankruptcy is a very complicated process with a lot of contingencies based on your personal situation.
Just what does it mean to file for bankruptcy? At some point, if you can’t afford to pay your bills and your debt balances are growing, you may have considered filing for bankruptcy. If you’re considering filling for bankruptcy as an individual, there are two types (or chapters) that you may have heard of:
Chapter 7: This is the most common form of bankruptcy. As an individual, you can get many or all of your debts discharged. At the same time, you may be forced to sell or liquidate some of your property in order to pay the creditors that you owe. If you file for Chapter 7 bankruptcy, the bankruptcy court will own your property and debts. That means you can’t give away or sell any of the property you own when you file for bankruptcy without the consent of the court (you can do whatever you choose with any new property or income you earn after you file). The entire Chapter 7 bankruptcy filing process takes anywhere from four to six months to complete and requires a nominal fee of a few hundred dollars.
Chapter 13: If you have a regular income source, Chapter 13 bankruptcy allows you to keep ownership of your assets, on the condition that you have to pay a portion of your future income to the creditors. This timeframe and amount is determined by your income, expenses, and equity. You won’t be discharged of your debt until your payment plan is over (and that takes about three to five years). Because you have to use your income to repay your debt during this repayment plan, you’ll have to prove to the court that you can afford these future payments. Your payment plan will include certain debts that you’ll need to pay in full (priority debts), like alimony, child support and some tax obligations. Your payment plan will also include regular payments on secured debts like your mortgage. The plan will essentially be your budget until the repayment period is over, demonstrating to the court that you have enough disposable income left to live off and pay toward your unsecured debts, like medical bills. You won’t need to repay these unsecured debts in full (or at all) but you must demonstrate that some income is going toward repayment. Like Chapter 7, the process takes a few months to complete and will cost you a few hundred dollars in filing fees.
As much of a negative stigma as it has in society, filing for bankruptcy can be a way out for many Americans that don’t think they can escape their financial obligations any other way. Just make sure you declare it the right way – not by shouting it out in a room full of people.