Bankruptcy: What To Know Before Filing

By James Parker
August 2, 2021

Over 750,000 American individuals filed for bankruptcy protection in 2019. The crushing burden of stacks of unpayable bills affects all types of people, not only low-income individuals with no college degree. In fact, roughly 20% of bankruptcies are filed by people with college degrees. 

Corporate bankruptcy filings receive the most media coverage. But business bankruptcies account for only 3% of total bankruptcy filings. The other 97% of bankruptcies are filed by individuals, with the majority of filings—67%—stemming from unpaid medical expenses.

Whether you’ve lost your job and are mired in credit card debt or are struggling to pay outstanding medical bills despite having steady employment, it might be tempting to seek a fresh financial start by filing for bankruptcy. But here’s what you need to know first. 

Bankruptcy Protection: Which Chapter Is Best For You? 

You’ve probably heard of Chapter 11 bankruptcy. But if you’re thinking about filing for bankruptcy protection as an individual, Chapter 11 does not pertain to you. Because of the media's attention placed on corporate bankruptcy, it’s probably the first to come to mind when someone thinks of bankruptcy. 

Chapter 11 involves the reorganization of a corporate entity to help it recover from financial distress. 

There are five other types of filings, each named after a chapter in the United States Bankruptcy Code. 

Let’s start with the two that most affect individuals: Chapters 7 and 13.

Chapter 7

The most common chapter filed by individuals, it’s also referred to as liquidation or straight bankruptcy. 

With Chapter 7, all your assets, minus your home and car and other necessities, are liquidated (sold) to help pay down the debts you owe to creditors. The liquidation of your assets is overseen by a trustee that’s appointed by the court. 

Although outstanding tax bills and student loans are not forgiven, other types of debts may be erased under Chapter 7 protection. Forgiven debts may include credit card bills and medical bills. 

However, because most people don’t have enough assets to sell (minus their house), to cover outstanding debts, people who file under Chapter 7 may still have to pay their creditors, possibly with friendlier loan agreements. 

To qualify for Chapter 7, which stays on your credit report for 10 years, a bankruptcy court must determine that you do not make sufficient income to repay your debts. 

Chapter 13

A restructuring plan of monthly payments, Chapter 13 is for those who earn enough money to pay off their creditors but can’t pay them in full all at once. 

Typically, the monthly payment plan will take three to five years to pay off your past debts. If you have less than $419,275 in credit card, medical bill, utility bill, and other types of debts that are not backed by collateral (unsecured debt), you may qualify for Chapter 13, which stays on your credit report for seven years. 

Chapter 12

Due to the consolidation of giant food producers, it’s getting harder and harder for small farmers to earn a living. Chapter 12 bankruptcy protection was written specifically so that farmers—and those who earn a living fishing—can avoid liquidation and pay off their debts between three and five years. 

Other Types of Bankruptcy

In addition to Chapters 11, 7, 13, and 12, there is also Chapter 15 and Chapter 9. The former is the most recent chapter added to the Code (2005) and deals with international concerns while the latter covers cities, counties, and school districts. 

Need Help Qualifying For Bankruptcy Protection?

If you feel burdened by your current financial situation, talking with an attorney about bankruptcy may help set your mind more at ease. However, to do that, you will need an experienced bankruptcy attorney. 

A skilled bankruptcy attorney will guide you through various court proceedings to reduce or eliminate your debt, or to proceed forward with bankruptcy if necessary. The best place to find a bankruptcy attorney is with Attorney at Law.

At AAL, we match you with the best attorney in your area. Our partners have the resources, legal expertise, and experience to navigate you through the highly complex field of bankruptcy law. In addition to a proven track record, our partners also excel in client care. 

Don’t wait. Contact AAL today for a free, no obligation consultation and begin your journey to financial independence.

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