Key Takeaways

If your debts have gotten out of control and you don’t think there’s a way to repay them, you may be wondering if bankruptcy is right for you. But before you decide to file for bankruptcy, you’ll need to determine if it will help your financial situation. Bankruptcy is a powerful tool that can help you discharge most unsecured debts, but you’ll still be responsible for tax debts, alimony, and child support.

What is Bankruptcy

Bankruptcy is a legal process that can allow you to restructure or discharge your debts. The “Bankruptcy Code,” which is a federal law, governs all bankruptcies in the U.S. This law aims to provide people facing financial difficulties with relief from some or nearly all of their debt.

The United States Trustee Program is the component of the Department of Justice responsible for overseeing the administration of bankruptcy cases and is administered by the Department of Justice.  For individuals, there are two main types of bankruptcies to know about: Chapter 7 and Chapter 13 bankruptcy. Chapter 11 bankruptcy offers reorganization for partnerships and corporations.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also known as straight bankruptcy or liquidation bankruptcy. With this type of bankruptcy, any property you have that is being used as security for a loan, e.g. your house for your mortgage loan and your car for your auto loan, will be put into a trust and assessed for its current market value.  Then, the trustee will sell these assets for as much as possible, and use the proceeds to pay off your debts. It’s a good choice for borrowers who don’t earn enough to repay debts.

A major benefit of Chapter 7 bankruptcy is that it allows you to come out of the bankruptcy with a clean slate. While it doesn’t wipe out tax liens against your home, your mortgage loan to the bank will likely be discharged.  In addition, your auto loan to the bank may be discharged, plus most of your unsecured debts will be eliminated, so you’ll get a fresh start.

Chapter 13 Bankruptcy

Chapter 13 is known as a reorganization bankruptcy. In a Chapter 13 bankruptcy, you’ll need to restructure and pay at least a portion of your debts over a period of three to five years. Then, the bankruptcy court will approve the bankruptcy discharge for the remaining debt at the end of the repayment plan–provided you have satisfied the terms of your approved repayment plan in full. Chapter 13 bankruptcy is better for borrowers who earn enough to afford debt repayment but may not be able to pay off their debts in full.

How Bankruptcy Works

Depending on whether you’re filing for Chapter 7 vs. Chapter 13 bankruptcy, the process will be slightly different. When filing for Chapter 7, the court will appoint a trustee to take over your assets. The trustee will sell your property to raise money to pay your creditors.

When you file for Chapter 13 bankruptcy, you may be able to retain your property. But, you’ll need to have a regular and sufficient income source so you can repay most of the debts as per the federal court’s approved repayment plan. A court-appointed trustee will collect payments and work with you throughout the process.

It’s also important to remember that bankruptcy cannot discharge any tax debts you have. You’ll also still need to pay alimony, child support, court fines, and student loans–these obligations may be restructured, but not discharged.

The Pros and Cons of Filing for Bankruptcy

Bankruptcy may discharge most of your unsecured debts and give you the opportunity to start with a clean slate, but it also comes with serious consequences for your credit. Consider the pros and cons of bankruptcy listed here before you decide if it’s the right option for you.


  • Once you file your bankruptcy paperwork, there’ll be an automatic stay that goes into effect, which forbids creditors from pursuing both formal and informal actions and remedies against the debtor and his/her property. This means debt collectors won’t be able to pursue collection action (by phone calls and letters) or legal action, including things like wage garnishment, until the court discharges the bankruptcy.
  • Bankruptcy offers you a chance to get your debt under control.
  • A trustee will communicate with your lenders throughout the bankruptcy process.
  • You may be able to keep some exempt assets in Chapter 7 bankruptcy. With Chapter 13, you’ll usually be able to keep assets while you repay debt.
  • Chapter 13 allows you to catch up with secured debt payments so you can avoid foreclosure and repossession.
  • You will be able to discharge all, or at least most of your unsecured debts, such as personal loans and credit card debts.


  • Creditors may not always be willing to work with bankrupt borrowers. Bankruptcy may also make it difficult for you to get new loans in the next few years, because it lowers your credit score drastically.  It may even prevent you from getting a new job, when a credit check is part of the application process.
  • You may lose non-exempt property, depending on the type of bankruptcy you file.
  • Bankruptcy, and its long-lasting effects, can stay on your credit report for up to 10 years, or possibly even longer.
  • Unless sealed by a special decree of the court (which is very rare), all types of bankruptcies are public information, so it may impact your privacy.
  • It may not discharge all of your debts, such as student loans, past due alimony, and tax debt.
  • Bankruptcy is not always easy to qualify for, especially Chapter 7, because you’ll need to pass the means test.
  • It can be expensive because of substantial attorney fees for all types of bankruptcy.
  • It may be difficult for some people to stick to the court-ordered payment plan for three to five years, under a Chapter 13 bankruptcy.

The Bankruptcy Filing Process

You can file bankruptcy on your own, but working with a bankruptcy lawyer is a better choice because it’s a complicated process. A lawyer is an expert with years of experience, so they can help you navigate the process, help you file documents on time, and lower your overall financial stress. It’s also important that you educate yourself about the process before you decide to file. If you’re ready to file, here are the basic steps in the bankruptcy process that you’ll need to follow.

1. Gather Financial Records

Start by getting a copy of your credit report. It will provide you with details about your credit score and the current status of all your accounts, such as personal loans, student loans, car loans, credit cards, charge-offs, and more. Make a list of all your debts and then gather the documents listed below:

  • Proof of income and pay stubs for the last six months
  • Tax returns for the last two years
  • Recent bank statements
  • Brokerage account or retirement account statements
  • Vehicle registration copy
  • Appraisals, ideally from a qualified third party appraiser, for any property you own
  • Other documents related to your income, debts, and assets

2. Get Credit Counseling

You’ll need to go through a qualified credit and financial counseling program before you can file for bankruptcy. This will assure the court that you’ve considered all other options before deciding to file. Any credit counseling agency you choose must be selected from the approved list provided by the U.S. Courts. Once you attend the session, you’ll receive a certificate of completion. You’ll need to provide this certificate along with your bankruptcy paperwork when you file for bankruptcy.

3. Complete the Bankruptcy Forms and File the Petition

There is a lot of paperwork involved in filing for bankruptcy. The bankruptcy form will ask you detailed questions about how much you earn, your expenses, debts, and assets. This will help the bankruptcy judge and trustee decide whether you’re eligible for bankruptcy.

If you’re working with a lawyer, they’ll complete the required forms based on the information you provide them. Without proper legal advice, you may not be able to understand which type of bankruptcy you should file, and which forms to submit to the court. Your lawyer can fill out the forms, submit the petition, and pay the required filing fee.  Your lawyer can also help you make sure you submit these documents and payments on time, as well.

4. Meeting with Creditors

If your petition is accepted, the court will appoint a trustee for your case. Your trustee will then set up a meeting with all your creditors. You’ll need to attend this meeting to answer any questions your creditors may have about the case. This is known as the meeting of creditors or the 341 meeting.

After you file for bankruptcy, you’ll receive a notice from the court with details about the meeting. The main purpose of this meeting is for the trustee to ask you standard questions and verify your identity and reasons for filing bankruptcy.

Find a Bankruptcy Lawyer

If you are planning to file for bankruptcy, consult a qualified bankruptcy lawyer to determine if this is the right choice for you. An attorney can provide you with honest advice based on your individual situation and explain how bankruptcy laws, exemptions, and the differences between Chapter 7 and Chapter 13 bankruptcy might apply to you, in your potential bankruptcy case.

If you can’t afford the services of an attorney, you may have a few options for free or low-cost legal advice. The American Bar Association offers information and resources for locating free legal services. The National Association of Consumer Bankruptcy (NACBA) protects the rights of consumers filing for bankruptcy and is a good resource for finding bankruptcy lawyers near you.

Rebuild Credit After Bankruptcy

Whether you file for Chapter 7 or Chapter 13 bankruptcy, your credit score will take a hit. The good news is that you’ll be able to start rebuilding your credit right away after your bankruptcy court proceedings are over. Since your credit may be low, it will be key to look into ways to build credit without a credit card. Also, the negative impact of bankruptcy will diminish over time, if you use credit responsibly. Here are a few tips on rebuilding your credit after bankruptcy:

  • Set a budget so you can account for all your expenses.
  • Keep up with payments on debts that the court did not discharge during your bankruptcy case.
  • Automate the monthly payments for your bills to avoid late payments.
  • Apply for a secured credit card and make regular payments on it.
  • Become an authorized user on a friend or family member’s credit card account. 
  • Don’t apply for credit or loans too often because hard credit inquiries may lower your credit score further.
  • Monitor your credit report periodically and report any inaccuracies you find.

How to Avoid Bankruptcy and Manage Your Debt

Bankruptcy is the last resort option for those who cannot manage their debt through other debt relief measures. Bankruptcy comes with serious consequences, such as significantly lowering your credit scores and liquidation of property (potentially at a significant capital loss), so your best bet is to avoid it if possible. Here are a few things to try before you consider bankruptcy:

  • Try to reduce your expenses wherever possible. Review your bank statements carefully to identify areas where you can cut expenses. Use the money you free up to pay down your debt.  Do not use the freed-up money on discretionary or wasteful purchases–stick to your budget!
  • Consider getting a second job or getting overtime hours at your work to increase your income. Use that extra income to make extra payments on your debts to pay them off as soon as possible.
  • If you still have good credit, consider debt consolidation to roll all your debts into one single loan, ideally at a lower interest rate. This may help simplify repayment while reducing the amount of interest charges you pay on the debts.
  • If you don’t qualify for debt consolidation, or if you can’t afford to pay your debts in full, consider debt settlement. Negotiate with your lenders to see if they’d be willing to accept a portion of your debt instead of the full amount.
  • Consider getting credit counseling to sort through your situation and enroll in a debt management plan. Many nonprofit counseling agencies can also negotiate with your lenders to lower your interest rates.  

The Bottom Line on Bankruptcy

If you are unable to manage your existing debts, spend some time learning about bankruptcy basics, the cheapest way to file for bankruptcy, the eligibility requirements, pros and cons, and alternatives you can consider such as other debt relief options compared to bankruptcy.

A debt relief professional can also help you determine the right course of action. Contact TurboDebt for a free consultation to see what debt relief option suits you best. Our team will offer you a personalized debt relief option based on your individual needs.