Personal bankruptcy is a legal process that allows an individual or a business to escape from overwhelming debts that they are not able to pay. For the average individual, there are two different types of personal bankruptcies, Chapter 7 and Chapter 13.

A Chapter 7 bankruptcy, also called a straight bankruptcy, or a liquidation bankruptcy, allows for certain types of debts to be damaged or liquidated. This means that the debt will be eliminated and the individual who owes the debt will not be required to pay those debts.

The majority of individuals with personal debts file bankruptcy under Chapter 7. The other common type of personal bankruptcy is a Chapter 13 bankruptcy, or reorganization bankruptcy.

With this type of bankruptcy, an individual will set up a repayment plan to pay off their debts.The individual will still be required to pay their debts, or a portion of them on a schedule to which the debtor agrees and is manageable for them.

How Do You Declare Bankruptcy?

For an individual to declare bankruptcy, they are required to file:

  • The petition for bankruptcy;
  • A schedule of assets; and
  • A statement of financial affairs.

The schedule of assets will list all of the assets that the individual owns. The statement of financial affairs describes the debts that the individual owes as well as why they are declaring personal bankruptcy.

Both of these documents are required to be filed within 14 days of filing the petition for bankruptcy. If an individual fails to file either of these documents in a timely manner, their case will be dismissed.

Due to these issues, it is recommended that an individual file their petition, schedule, and statement at the same time. That way, there is not a risk of having the case dismissed for this reason.

How Do I Know if I am Eligible for Personal Bankruptcy?

There are restrictions placed on who is permitted to file for bankruptcy. An individual may not file for Chapter 7 bankruptcy if any of the following apply:

  • Previous discharge of debt: The individual has obtained a Chapter 7 discharge of their debts within the last 6 years;
  • Previous application dismissed: The individual had an application for Chapter 7 dismissed within the 180 days prior to the current filing;
  • Defrauding of creditors: The individual has defrauded creditors by such acts as submitting fraudulent information to creditors or concealing assets from them;
  • Submission of fraudulent information to the bankruptcy court: The individual has submitted fraudulent information to the bankruptcy court; and
  • Red flag activities: The individual has engaged in certain red flag activities that indicate an abuse of the bankruptcy system.

These restrictions have been imposed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 in order to prevent individuals from abusing bankruptcy privileges.

What are the Consequences of Declaring Personal Bankruptcy?

There are numerous consequences of declaring personal bankruptcy. It is considered to be a last resort for individuals or businesses that are unable to satisfy their debts.

There are several positive and negative consequences of declaring personal bankruptcy.

Positive Consequences
There are positive consequences of declaring bankruptcy. If an individual filed a petition for bankruptcy in Bankruptcy Court, and the court grants the petition, an individual will likely have more financial breathing room.

Once an individual files for bankruptcy, their debtors are stayed from pursuing them, referred to as an automatic stay. One an individual’s bankruptcy is finalized, much of their debt will be wiped out.

In many cases, this includes debt from:

  • Credit cards;
  • Credit loans;
  • Medical debt; and
  • Foreclosures.

Negative Consequences
Although there are positive consequences of declaring bankruptcy, there are also important issues an individual should consider before filing, including:

  • Although the individual can improve their credit score over time after a bankruptcy, at first, declaring bankruptcy will damage the individual’s credit, both their credit score and their credit report;
    • It may be that their credit is already poor when they file, due to their financial distress. The hit their credit will take depends on the amount of debt they had and how many different creditors they owed;
    • As a result of poor credit, they will have difficulty obtaining lines of credit and various types of loans in the future;
      • This includes home loans, so the individual will not be able to purchase a home in their own name while the bankruptcy remains on their record;
  • Debts that are incurred during the bankruptcy process, which may take several months, and are not listed in the original petition will not be included in the bankruptcy, and, therefore, will not be discharged;
    • Debts that are incurred in the six months prior to filing for bankruptcy may also be examined closely, and possibly excluded from discharge.
  • Although an individual may file for bankruptcy more than once, they cannot do so for 7-10 years after they file, depending on what type of bankruptcy they file. The individual cannot file for it again for another 8 years;
    • Because of this, it is important to include all of an individual’s most burdensome debts when they file bankruptcy;
  • Bankruptcy is public. Declaring bankruptcy can be something the individual would rather not have other people know. Unfortunately, it is a matter of public record if an individual has declared bankruptcy because court records are available for the public to view;
  • Bankruptcy may be expensive. Depending on the type of bankruptcy the individual files, it may be a little more or a little less. The filer will be required to pay court costs and attorney fees, which may amount to a couple of thousand dollars the individual likely does not have available to spend;
  • There are certain types of debt that cannot be discharged in bankruptcy, including student loans. Student loans must still be repaid even if the individual files for bankruptcy successfully;
    • Income tax debt is also typically not dischargeable. There are also other debts that are not dischargeable, such as child support and alimony payments owed;
  • It is also very important to note that if an individual had a cosigner for a debt, that individual will still be liable for that debt;
  • The individual can lose property, such as their house, depending on the type of bankruptcy they file and some other factors. The bankruptcy trustee can seize the individual’s property in order to satisfy debts in certain cases; and
  • Some employers may not like that an individual has previously declared bankruptcy, should they apply for jobs in the future.

What are Some Tips to Consider before Declaring Bankruptcy?

There are numerous issues an individual should consider before they file for bankruptcy. In certain situations, declaring bankruptcy may help an individual or a business get a head start on rebuilding their finances.

In many cases, an individual will have no issues applying for a new credit card following a bankruptcy. For businesses, declaring bankruptcy may help to preserve their name and reputation.

When an individual is considering declaring bankruptcy, they should consider the areas of their life that may be affected, including:

  • Tax consequences;
  • Estate considerations;
  • Employment matters; and
  • Family law issues, such as spousal support.

What Happens after I Declare Personal Bankruptcy?

Once an individual files for personal bankruptcy, there are three things that will occur:

The automatic stay prevents creditors from attempting to collect any debts from an individual on their own. The court also appoints a trustee to administer the debtor’s estate, which includes all of the assets of the debtor.

If an individual files for Chapter 7 or Chapter 13, a creditor’s meeting, or 341 meeting, will be scheduled. The debtor is required to attend this meeting or their case may be dismissed.

Do I Need a Lawyer for Help When Declaring Personal Bankruptcy?

If you are wondering, “should I declare bankruptcy?” it may be helpful to consult with a bankruptcy lawyer. Your attorney can help determine what type of bankruptcy best fits your needs.

Your attorney will help you fill out your paperwork accurately and completely, file your paperwork, and represent you during any proceedings.