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Bankruptcy filing: When and why should you file Chapter 7 or 13

Bankruptcy is regarded as the ultimate debt relief solution – one which is chosen only when other debt elimination processes fail to revive the finances of a debt ridden individual. It is a legal process which promises a fresh financial start to the consumers by eliminating their outstanding bills and dues. This federal law, which dictates a judicial course of action either results in the discharge of most or all unsecured debts of an individual or reorganizes the debts with a court-approved payment plan. However, certain bankruptcy cases may also involve loss of the consumer's assets to pay off his creditors.

When can you file bankruptcy?

Bankruptcy might seem to be the best debt solution when nothing else seems to work in your favor. One or more of the following common reasons might prompt you to file for bankruptcy.

  1. 1 You are burdened with enormous debt and not in a financial situation to pay off debts
  2. 2 None of your attempts to pay off debt worked
  3. 3 You risk losing assets to creditors
  4. 4 You are unemployed or have lost your job recently

How to prepare for bankruptcy

When you decide to file bankruptcy you need to be sincere so that the court does not dismiss your petition. The Court will look to see if you have done any of the following which may cause it to dismiss your petition.

  • Incurring credit card debt or taking out more loans.
  • Giving out loans to friends and family members.
  • Selling your valuable assets to others without an attorney’s consultation.
  • Opening a joint bank account with someone else (except your spouse).
  • Allowing others to transfer money in your bank account.

When you file your bankruptcy petition ensure that you disclose all your existing debts that includes student loan as well payday and any other loans as well as any assets you own or have an interest in wherever they may be located. If you inherit property or cash in the next eight months or property that has been transferred to a trust in the last 10 years then this should also be included in your petition.

What things should you know before filing bankruptcy?

It is not advisable to exhaust your savings until consulting with an attorney as you are only permitted to keep a certain amount in cash or bank accounts. The amount may vary from one state to another and also depends on whether you're single or married.

If you do spend down your savings it must be utilized for legitimate expenses but ensure that you maintain a document of receipts for any purchase exceeding $100 while you plan for bankruptcy filing.

What are the two main types of consumer bankruptcy?

Bankruptcy comes along in various forms. Since bankruptcy leaves a noticeable mark on your financial history, it's extremely important to choose the right form which suits your specific situation. For this reason, it's sensible to sit with an experienced attorney for a pre bankruptcy counseling.

The two most common form of consumer bankruptcy are:

Chapter 7
Straight Bankruptcy/Liquidation

This is the basic liquidation bankruptcy for individuals and businesses. Since it usually involves the discharge of debt, it's considerably a simpler and faster process.

Chapter 13
Adjustment of an individual's debt

This form of bankruptcy adjusts an individual's debt in a way that his debts are repaid, as much as possible. It involves formulation of a court-approved repayment plan for individuals with steady source of income.

Why is it better to hire a bankruptcy attorney than to do it on your own?

It's not absolutely necessary that you have to hire an attorney when you're about to file your bankruptcy. You can represent yourself in the court. However, it's strongly recommended to consult one for bankruptcy help since, after the enactment of BAPCPA in 2005, filing bankruptcy has become much more complicated and time consuming. A minor mistake during the filing process or violation of the bankruptcy laws, may result in rejection of your case.

Thus, before you decide to file your own bankruptcy, check out the following list to understand how an experienced bankruptcy attorney can be a better choice.

Hire Bankruptcy Attorney Do It Yourself (DIY)
Free initial consultation
Protection from creditor harassment
Appropriate legal advice (asset protection, valuation of assets, listing exempted property, etc..)
Protection from mistakes while preparing bankruptcy forms
Absolute peace of mind

How much is the cost of filing bankruptcy?

The term 'affordable bankruptcy' is misleading to some extent, since a debtor needs to pay the mandatory court fees sometime after his case is successfully filed with the court. The filing fee for Chapter 7 bankruptcy is approximately $306, while it's approximately $281 for a Chapter 13 case. Check with the US Bankruptcy Court where you intend to file for the exact filing fee. In addition to the court costs, the consumer also needs to bear the attorney fees for valuable bankruptcy advice.

Be prepared to spend between a hundred and a few thousand dollars when you’re filing bankruptcy. The total bankruptcy filing cost depends on various factors like:

  • The type of bankruptcy you’re filing
  • If you’re filing bankruptcy with the help of an attorney or on your own

Bankruptcy filing fees usually vary between $300 and $400. If you’re opting for pro se bankruptcy, then you won’t have to pay attorney fees. However, bankruptcy is a legal process and has too many clauses for various types of financial scenarios. One wrong step is enough to have the Court dismiss your bankruptcy case completely. Plus, bankruptcy attorneys can help you to protect your income and properties to a great extent. So it’s better to consult a bankruptcy attorney and be on the safe side.

Chapter 7 and Chapter 13 bankruptcy filing fee

You have to pay bankruptcy filing fees just to let the court acknowledge your case.

The cost of filing bankruptcy
Chapter 7 Chapter 13
Filing fee $335 $310
Credit counseling fee $50 $50-$100
Debtor’s education course $500 - $3500 $2500-$6000
Attorney fees $500 - $3500 $500 - $3500

In the case of Chapter 7 bankruptcy, you have to pay the attorney fee upfront since that would be included in the total debt discharged. In the case of Chapter 13 bankruptcy, you have to pay only a small part of the attorney fee upfront. You can pay the rest of the amount throughout your debt repayment plan, which varies between 3 years and 5 years.

Much depends on the place where you live and the complexity of your case. If your bankruptcy case is simple and you live in a rural place, then the attorney may charge you less. Again, bankruptcy attorneys may charge you more in the following scenarios.

  1. You need to file both personal bankruptcy and business bankruptcy.
  2. You have a huge number of creditors.
  3. You have already filed bankruptcy once in the last 8 years.
  4. Your household income is more than the state median mode.
  5. You have fraud allegations against you.

What if you can’t pay bankruptcy fees

Well, if you don’t have money to pay the bankruptcy fee, then there are a few steps you can take to lower the overall cost.

(i) Request the court for a waiver: You can request the court to waive the filing fee in Chapter 7 bankruptcy when your income is less than the federal poverty line or you can’t pay the fee in instalments.

(ii) Arrange a repayment plan: Where there is a will, there is always a way. You can request the court to allow you to pay the bankruptcy filing fee in installments. But make sure you pay the fee within 120 days of submitting the petition.

(iii) Consult legal aid offices: Some legal aid offices do give free legal advice to individuals with poor income. If you’re eligible, they may agree to represent you without charging any fee. The only problem is that they are overloaded with work. So it may take several months to get off the waitlist. If you can wait for a long time, then this option is good for you.

(iv) Sell some of your stuff: In Chapter 7 bankruptcy, you’re more likely to lose non-exempt properties or assets eventually. So if you don’t have money to pay the filing fee, then you can sell some of your stuff to generate money for paying the bankruptcy fee. However, the Court can look at and ask about assets sold or transferred before filing bankruptcy.

How long does bankruptcy last?

The length of time that a bankruptcy proceeding may take completely depends upon the type of bankruptcy that a petitioner selects. If you are opting for Chapter 7 or ‘liquidation’ bankruptcy, it can take around four to six months to complete depending on the Court’s caseload, number of bankruptcy cases filed. However, if you opt for Chapter 13 bankruptcy, the completion period is longer. As per federal law, the maximum period that is allowed for the completion of a Chapter 13 plan is anything between 36-60 months.

How bankruptcy can affect your credit rating?

A bankruptcy filing can have a significant impact on your credit score. Not only does it bring down your credit score, but it also stays on your report for approximately 7 to 10 years. However, most individuals filing bankruptcy already suffer from poor credit situations by the time they file bankruptcy. So, getting rid of the debts might seem a good option at that point. Moreover, bankruptcy is not as bad as it seems. Some people have found their credit score went up.

How is that possible?

Well, after you have discharged all your debts successfully, your credit utilization ratio goes down. It might even become 0, which is the ideal credit utilization ratio. This helps to pull up your FICO score. Besides, just because you filed bankruptcy, it doesn't mean that you'll not be allowed credit within or after the 10 year period. And, you can rebuild your credit post-bankruptcy. Here are the 10 tips for you.

Is your COD income always taxable?

Not always. If your debt has been forgiven under Title 11 of the United States Code (US Bankruptcy Code), then the resulting COD (Cancellation of Debt) income will be federal income tax free. This is applicable to Chapter 7, Chapter 11, and Chapter 13 Bankruptcy. If the borrower is insolvent immediately before the creditor has cancelled debt, the COD income will not be included to calculate federal income tax.

What is Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)?

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which came into effect from October 17, 2005, vastly amended the U.S. Bankruptcy Code. This act made numerous changes to the bankruptcy law, thus making it much more complex and unattainable than ever before. BAPCPA has drastically changed the bankruptcy process and rules by introducing some complex pre bankruptcy hurdles like credit counseling, financial management, tax returns, and most importantly - the means test.

(Associate Attorney)
Rocklin, California
Updated On Feb 10, 2021

Mr. Solomon has significant hands on skill and expertise in legal research and writing and extensive litigation experience. He has been licensed with the state bar of California since 2003. He graduated from University of the Pacific, McGeorge School of Law, Sacramento, California in 1998 and currently works in Rocklin, California.

Last Updated on: Wed, 10 Feb 2021