Bankruptcy Basics: Questions and Answers

Learn the basics about bankruptcy in this series of common questions and answers.

If you are considering filing for bankruptcy relief, you probably have many questions. Click the links below for answers to commonly asked bankruptcy questions.

1. How does bankruptcy work?

2. How does it compare to other options?

3. What happens to my property?

4. What happens to my debt?

5. Will I need to hire a lawyer?

Bankruptcy Basics

Here you'll find the most basic bankruptcy questions and answers.

How does bankruptcy work?

Most debtors file for either Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 bankruptcy is designed primarily to discharge qualified debts such as credit card balances and medical bills. In exchange for the discharge, the bankruptcy trustee appointed to oversee your case sells assets that you can’t protect with a bankruptcy exemption and uses the proceeds to pay your creditors.

In Chapter 13 bankruptcy, you get to keep all of your property. In exchange, you pay back some or all of your debts through a repayment plan. Chapter 13 allows debtors to restructure debts while catching up on back taxes and missed mortgages, car loans, and domestic support payments.

Who can file for bankruptcy?

Both chapters have financial requirements that must be met. And while any individual, married couple, or business entity can file for Chapter 7, Chapter 13 isn’t available to businesses. Learn about options for small businesses.

How long does bankruptcy take?

A typical Chapter 7 bankruptcy will take approximately three months to complete. Chapter 13 involves a three to five-year repayment plan, and you’ll finish it after making all required plan payments to the trustee.

How much does bankruptcy cost?

Currently, court filing fees are $338 for Chapter 7 and $313 for Chapter 13 (as of December 2020). If you decide to hire a bankruptcy lawyer, attorney fees typically range from $1,000 to $3,500 for a Chapter 7, depending on your case's complexity. They are generally between $3,000 and $5,000 for a Chapter 13, but you can pay a portion of your attorney fees through your repayment plan.

Will I have to go to court?

In Chapter 7 bankruptcy, you don't go to court in most cases. But you are required to attend a hearing called the meeting of creditors (also called the 341 hearing).

In Chapter 13 bankruptcy, you might have to attend a confirmation hearing in front of the judge. But keep in mind that if any of your creditors file motions or objections in bankruptcy court, you will typically have to attend a court hearing on the matter. As a result, whether you will have to go to court will depend on the individual circumstances.

Will bankruptcy affect my employment in any way?

Bankruptcy won’t affect your current employment or future employment options, but there are exceptions. If you’re in the military or require a security clearance, financial instability can affect your employment or clearance. Learn more about bankruptcy and your job.

Deciding Between Bankruptcy and Other Options

Is bankruptcy your only option? Here are some common questions about your bankruptcy options.

Should you file for bankruptcy?

The answer depends on each debtor's circumstances. If you are struggling to pay back your debts and your creditors are unwilling to work with you, you might be a good candidate for bankruptcy. But whether bankruptcy is in your best interest also depends on the types of debt you have and the amount of property you own.

The tipping point for most people is when debt collectors or creditors become a constant source of stress, collection lawsuits are filed, wages are garnished, or there is a threat of foreclosure. If you are facing any serious issues caused by unpaid debt, then it's a good idea to talk to a bankruptcy attorney to discuss your options.

What about alternatives like debt settlement?

Debt settlement is a viable solution for some debtors. But it does have serious drawbacks. Debt settlement does not guarantee any particular outcome. If a creditor refuses to settle, you won’t be able to do much about it. Also, any forgiven debt can be treated as income by the IRS and increase your tax liability.

But debt settlement companies tell me I can settle for pennies on the dollar?

Be wary of any company you see advertising the ability to settle your debt for pennies on the dollar. You can settle many debts with creditors, but the settlement amount will vary. Also, you typically must have the cash available in a lump sum. If you’re interested in debt settlement, you can usually do it yourself or consult a bankruptcy attorney about it.

How about debt consolidation?

Debt consolidation may be an option if you can afford to pay back your debts. But avoid any debt consolidation companies that charge unreasonably high fees. Debt consolidation can work if you just need to lower your interest rate and monthly payments.

More Information

For more information on whether bankruptcy is the right choice for you, see Should I File for Bankruptcy?

Your Property in Bankruptcy

Is your property safe from bankruptcy? Here are some common questions about your property and bankruptcy.

Will I lose all of my property if I file for bankruptcy?

No. Filing for bankruptcy doesn’t mean you have to give up all of your assets. In Chapter 7, bankruptcy exemptions determine the amount of property you can keep. Each state (and the federal system) has its own unique set of exemptions. An overwhelming majority of Chapter 7 bankruptcies are "no asset" cases—the trustee can’t sell any assets to repay creditors.

As discussed, if you file for Chapter 13 bankruptcy, you get to keep all of your property. But you must pay an amount equal to the value of your nonexempt assets to your unsecured creditors in your repayment plan.

Can I keep my car if I file for bankruptcy?

The answer depends on the value of the car and whether you have a car loan. Almost all states allow debtors to exempt a certain amount of equity in their motor vehicles. If your motor vehicle exemption covers the equity in your car (or another applicable exemption, such as a wildcard exemption), the trustee won’t be able to take your car. If you have a car loan, it will be treated as a secured debt in your bankruptcy. So if you want to keep your car, you have to continue making your regular payments. If you default on your car loan, your lender has the right to repossess the vehicle regardless of your bankruptcy discharge.

What if my car payment is too high?

If your car payment is too high, you may be able to reduce your monthly obligation through Chapter 13 bankruptcy. If certain conditions are met, you can reduce your loan balance and interest rate through a cramdown in Chapter 13. But even if you don't qualify for a cramdown, you may be able to reduce your monthly payments by paying the car off through your repayment plan and stretching out the payments over a more extended period. Find out how a bankruptcy cramdown can reduce your car payment.

What about my house?

Most states also have a homestead exemption that protects a certain amount of equity in your principal residence. If your equity is above the exemption amount, then you may still be able to file for Chapter 13 bankruptcy and keep your home. Chapter 13 also allows you to catch up on any missed mortgage payments through your plan.

What about rental or investment property?

The homestead exemption does not cover equity in rental or investment properties. As a result, if you want to keep your properties, Chapter 13 is likely a better choice. If you are upside down on those properties, the trustee will not go after them because there is no value to the bankruptcy estate. But Chapter 13 might allow you to cramdown your rental or investment property mortgages if they exceed the property's value.

Are my retirement accounts protected?

In general, yes. Many retirement accounts are protected in bankruptcy. But if you take the money out of your retirement account before filing your case or if it is not a proper retirement account, then the trustee may be able to go after that money.

What should I do with my bank accounts?

Generally, you don't need to do anything with your bank accounts. But make sure that you can exempt all of the money in your account before filing your case. If you can't, a Chapter 7 trustee can take the money and give it to your creditors. If you have more money than you can exempt, try to spend it on necessary living expenses such as rent, food, and gas to reduce your balance before filing.

If the bank is a creditor in your case (for example, if you have a credit card issued by your bank), then it may be a good idea to take the money out and open an account with a different bank. If your bank is a creditor, it may try to freeze your funds or go after your money.

Learn More

Find out more about property and exemptions in bankruptcy.

Your Debts in Bankruptcy

Here are the most common bankruptcy debt questions.

What debts are discharged in bankruptcy?

The most common debts that are discharged in bankruptcy are credit card debt, personal loans, payday or cash advance loans, and medical bills. Bankruptcy also discharges your liability on secured debts such as your mortgage or car loan. Still, it does not eliminate the lender's lien on your property (the bank retains the right to foreclose on or repossess the property).

What debts are not discharged?

Certain obligations (called priority debts) can't be discharged through bankruptcy. The most common examples of priority debts include alimony, child support, and recent tax debts. Student loans are not considered priority debts, but they are also nondischargeable (except in infrequent circumstances).

How much debt is enough to warrant filing for bankruptcy?

The answer varies from person to person. But keep in mind that once you receive a Chapter 7 discharge, you must wait eight years before you can file another Chapter 7 case. As a result, bankruptcy should be reserved for when you need it most.

Can tax debt ever be discharged?

Tax debts that are older than three years may be discharged if certain conditions are met. In general, you must also have filed your returns at least two years before the bankruptcy. But you must satisfy many requirements before a tax debt will be deemed dischargeable. The laws and conditions regarding tax debt discharge can be extremely complicated. As a result, consider talking to a knowledgeable bankruptcy attorney in your area before filing your case.

Can student loans ever be discharged?

In general, student loans can only be discharged in infrequent circumstances. If you can prove that the debt repayment would be an undue hardship on you, then it may be discharged. However, this is extremely difficult to prove and rarely done successfully. You may have a better chance of discharging student loans if you have become permanently disabled and will never be able to work again.

Can lawsuit judgments be discharged?

In most cases, lawsuit judgments are dischargeable in bankruptcy. But if a judgment lien has attached to your property, you will have to file a separate motion to avoid the lien. Your discharge will not automatically get rid of liens on your property.

More Information

Find more information about debt relief and bankruptcy.

Bankruptcy Lawyers and Petition Preparers

Sometimes hiring a lawyer is your best option when filing for bankruptcy. Here are some common questions about hiring a lawyer.

What is a bankruptcy petition preparer?

In general, petition preparers offer nothing more than a typing service. They are not allowed to give you any legal advice. Petition preparers complete the necessary bankruptcy forms with the information you provide them.

Do I need a lawyer to file bankruptcy?

No, as long as you’re an individual, you are not required to have an attorney to file for bankruptcy. If you are willing to put in the necessary time and research, you might be able to file a simple Chapter 7 bankruptcy on your own. However, for more complicated bankruptcies and Chapter 13 cases, it is recommended that you hire an attorney.

What if I can't afford a lawyer?

Many bankruptcy courts offer free clinics to help debtors file for bankruptcy without an attorney. You can also check for other free clinics or legal aid societies in your area that may be able to help. Also, many attorneys offer reduced rates or may take on your case pro bono (for free) if your case is simple and you have no resources to afford a bankruptcy lawyer.

What will a lawyer do for me?

Consulting with a bankruptcy attorney before filing your case can help you make an informed decision about bankruptcy. If you decide to file, your attorney will complete the necessary bankruptcy paperwork, file your bankruptcy, and help you navigate the bankruptcy process.

More Information

To learn more, see Working With a Bankruptcy Lawyer.

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