For most individuals, filing for bankruptcy is done as a last resort. It is often the best solution that remains after an individual has explored other options, including:

  • Negotiating with creditors;
  • Seeking credit counseling services; and
  • Creating a strict budget to pay off debts.

Individuals may file for bankruptcy for a number of reasons. Some of the most common reasons include:

  • Their financial problems are not temporary;
  • They have lost a steady source of income, such as long-term unemployment;
  • Their house is about to be foreclosed upon;
  • Significant health debts have been incurred;
  • Their wages are being garnished;
  • Paying for one credit card with another; 
  • Putting necessessities on credit cards;
  • Paying bills from retirement accounts; or
  • Working multiple jobs and still being financially overextended.

There may be a negative social stigma that is associated with filing for bankruptcy. However, the purpose of bankruptcy is a positive one, to give an individual a fresh economic start. Many individuals who file for bankruptcy find that the advantages greatly outweigh the disadvantages.

It is important to remember, however, that bankruptcy is not an easy, get-out-of-debt free solution. In many cases, individuals will have to forfeit their property or belongings and may face difficulty obtaining credit or loans for several years following the bankruptcy.

What is Bankruptcy?

Bankruptcy is a legal process which allows eligible individuals and businesses to discharge their pre-existing non-exempt debt or to adjust their debt using a repayment plan that meets their specific needs and ability to pay. A debtor may be permitted to discharge their debt if they are seeking to do so honestly. 

In other words, if an individual is not attempting to discharge their debt for fraudulent reasons and are not concealing assets that might be used to pay off their debts. There are certain types of debts, however, that cannot be discharged, or are non-dischargeable. These include:

  • Support debts, such as alimony and child support; 
  • Student loans;
  • Taxes; and
  • Fines.

Once an individual files for bankruptcy, the bankruptcy court will issue an automatically stay which prohibits creditors from attempting to collect on debts which are included in the bankruptcy and are not otherwise exempt from discharge.

What Types of Bankruptcy Proceedings are There?

There are several different types of bankruptcy for individuals and businesses. The two most popular for individual consumers are Chapter 7, also known as liquidation bankruptcy, and Chapter 13, also known as reorganization or repayment bankruptcy.

Chapter 7 bankruptcy is most frequently used by consumers who wish to completely discharge their debts. Chapter 13 bankruptcy is for individuals who have too much income for a Chapter 7 and who want to keep some of their property. A Chapter 13 bankruptcy allows the individual to make affordable payments on the property they keep.

In a Chapter 7 bankruptcy, non-exempt property can be sold, or liquidated, in order to satisfy the individual’s debts. One the bankruptcy process is complete, a creditor cannot collect any debts which were discharged during the bankruptcy proceeding.

In a Chapter 13 bankruptcy, a debtor will present a repayment plan. If that plan is approved by the court, it will allow the debtor to repay creditors over a longer period of time. 

What are the Advantages and Disadvantages for Filing for Bankruptcy?

There are advantages and disadvantages that an individual should consider prior to filing for bankruptcy. If an individual has become tired of calls and letters from creditors regarding debt they know they can never afford to pay, a bankruptcy may be a welcome relief.

If an individual has attempted to negotiate with their creditors and has sought the assistance of credit counseling services with no relief, bankruptcy may be advantageous. The idea of  discharging debt is always appealing. However, if an individual still has steady employment, it may be more advantageous for them to establish a payment plan, which typically lasts from 3 to 5 years.

There are, however, disadvantages to filing for bankruptcy as well. An individual may have to give up large portions of their belongings. In addition, bankruptcy remains on an individual’s credit report for years after the process is complete, 10 years for a Chapter 7 and 7 years for a Chapter 13.

These issues will make it more difficult for an individual to obtain a credit card, loan, or mortgage. It may also be viewed negatively by employers. Additionally, if an individual files for bankruptcy now, they may be required to wait several years prior to filing for bankruptcy again.

Can I File for Bankruptcy if I Am Unemployed?

Yes, an individual can file for bankruptcy if they are unemployed. Bankruptcy rules do not require an individual to be employed. However, the individual’s past and present income may affect their ability to qualify for both Chapter 7 and Chapter 13 bankruptcy.

For example, an individual who recently lost a high paying job may not qualify to file for Chapter 7 bankruptcy. Conversely, an unemployed individual would not qualify to file for Chapter 13 bankruptcy if that lack of employment would prevent them from paying a repayment plan. 

Chapter 7 and Chapter 13 bankruptcies have different qualification requirements. Unemployment will affect an individual’s bankruptcy depending on several factors, including:

  • How long the individual has been unemployed;
  • How much the individual made at their previous job;
  • Whether the individual will start another job soon;
  • Whether the individual has another source of income; and
  • Whether the individual plans to file for Chapter 7 or Chapter 13 bankruptcy.

The best way to determine if an individual is eligible to file for bankruptcy and which chapter best suits their needs is to consult with an attorney. An attorney will be able to discuss the advantages and disadvantages for an individual’s particular situation.

What are Some Bankruptcy Considerations Connected with COVID-19?

COVID-19 has caused some temporary changes to the bankruptcy process. President Biden signed the COVID-19 Bankruptcy Relief Extension Act on March 27, 2021. This act extended provisions of the CARES act that applied to personal and small business bankruptcy relief.

Provisions of this act which affect Chapter 7 and Chapter 13 bankruptcy include:

  • The amendment of the definition of income to exclude COVID-19 related payments;
  • Clarification that the calculation of disposable income for the purpose of confirming a Chapter 13 plan does not include COVID-19 related payments;
  • Allowing individuals and families who are currently in a Chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the COVID-19 pandemic, which may include extending payments for up to 7 years after the initial play payment was due.

On the logistical side, bankruptcy courts have modified operations in order to protect public safety. Although some courts closed, they are slowly reopening and may be operating virtually.

If an individual filed for bankruptcy but the court closed prior to completing the process, they will still be protected from creditors pursuant to the automatic stay. If the court an individual wishes to file in closed, they may seek legal advice to determine if they are eligible to file in a different court.

The modifications for COVID-19 vary by jurisdiction and by individual courthouse. It is important to determine the rules and requirements for each specific court.

As noted above, there are temporary changes to the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriations Act of 2021 (CAA). These changes include the ability to extend a payment plan in a Chapter 13 bankruptcy to seven years.

In order to obtain this modification, however, there must be notice and a hearing. At the hearing, the individual must show a material financial hardship which resulted from COVID-19. 

Do I Need a Lawyer to File for Bankruptcy?

Yes, it is essential to have the assistance of a bankruptcy lawyer when you are considering filing for bankruptcy. Facing bankruptcy can be intimidating and scary. 

Consulting with an attorney prior to filing bankruptcy is the best way to successfully discharge eligible debts. An attorney can review your situation, determine which chapter best suits your needs, and represent you throughout the bankruptcy process.