When you file for bankruptcy, the process will depend on which chapter you are seeking protection under. In general, individuals will file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 is referred to as “straight bankruptcy” while Chapter 13 is known as “wage earner bankruptcy.”
In general, the process of Chapter 7 bankruptcy involves liquidating your assets, assessing your debts owed, and resolving as many of the debts as possible with the assets you have. Depending on the circumstances of the bankruptcy, you may be able to retain some property under Chapter 7.
Chapter 13 bankruptcy has a similar process of assessing debts owed and amassing assets owned, but Chapter 13 aims to create a payment plan to reorganize debt rather than simply selling all possessions to pay off the debts. Most processes in bankruptcy are handled by the trustee on your behalf.
Bankruptcy is designed to assist people whose finances have collapsed either due to bad luck or bad decisions. The most common reason for bankruptcy is high levels of medical debt. When debt becomes overwhelming and it seems impossible to pay it off, bankruptcy can offer a way out. A common rule of thumb is that if the debt cannot realistically be paid off in five years, then bankruptcy should be considered.
How long a bankruptcy filing can stay on your credit report varies depending on the chapter of bankruptcy filed for. Chapter 7 bankruptcy stays on your record for up to a decade. By contrast, Chapter 13 bankruptcy stays on your record for seven years. For other forms of bankruptcy, the amount of time that a bankruptcy stays on your credit can vary.
Bankruptcy is not a perfect solution to the problems of insolvency. While personal bankruptcy chapters are a useful last-ditch effort to stop the onslaught of debt, there are significant drawbacks to consider.
First, bankruptcy proceedings are not free. There are administrative and court costs that can impede your ability to utilize it. Second, bankruptcy will drag down your credit score for up to a decade after filing. Third, bankruptcy can take many of your assets, but not all debts can be discharged through bankruptcy. These downsides are important to consider before filing for bankruptcy.
There is no hard limit on how many times you can file for bankruptcy. Instead, each chapter of bankruptcy has a window that limits when they can be filed for again. For example, if you successfully file for and are granted relief under Chapter 7 bankruptcy, you will not be allowed to petition for Chapter 7 bankruptcy again for eight years. A successful Chapter 7 bankruptcy will also prevent you from filing Chapter 13 bankruptcy for four years.
