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What is Bankruptcy and Should I File for It?

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The phone is ringing off the hook and it fills you with a sense of dread each and every time. The bills are piling up on the kitchen counter. It feels like you can hardly breathe under the huge financial burden that you’re facing.

Being late for one bill can feel stressful, but being late on all of them is a different kind of torture. The question is, should you file for bankruptcy to get some relief from the burden?

I know when one of my bills was sent to a collection agency, I was eager to get the issue resolved as quickly as possible.

I didn’t enjoy the constant letters in the mail threatening further action and the unending phone calls about my debt. Being late on more than one bill can leave you struggling to catch up financially, and you might be better off filing for bankruptcy.

This is a major financial move that you need to think through before making an impulsive decision. It can affect your credit for years to come, and it may not dissolve all of your debt.

If it does help you to dig out from under a mountain of debt, you may have to sacrifice some of your assets to do so. Before you file the paperwork or contact an attorney, here are the basics of what you can expect when filing for bankruptcy.

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What is Bankruptcy and The Different Types

When you feel overwhelmed by debt, you might begin to think about filing for bankruptcy and what it means for your finances.

In these early stages, you may not even realize that there are multiple types of bankruptcy that you could claim. Understanding the differences between them can help you to make a wise decision regarding this major financial move.

First of all, you need to know what bankruptcy is. It is a formal legal proceeding for individuals who are unable to repay their current debts.

Most often, you will file a petition which will be overseen by the federal courts. Your assets and income will be evaluated to see whether the debts will be discharged or repaid (in part or in full). Your debt will either be forgiven or a repayment plan will be formed.

Individuals are eligible to file for two different types of bankruptcy known as Chapter 7 or Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the more common of the two types. You may sometimes hear this referred to as straight bankruptcy.

The goal here is to discharge any type of unsecured debt (money that you owe that has no collateral attached to it such as personal loans or credit card debt). You will be able to maintain most of your property and assets unless you have significant equity in some of them.

In these cases, you may have to liquidate them in order to satisfy a portion of your debt.

Not everyone is eligible for Chapter 7 bankruptcy. If you are a high-income earner without a significant amount of debt, you may not be allowed to file because you will be expected to work out a repayment plan.

To qualify, you must pass the means test. First, you need to determine what the median income is in your state for your family size.

If your monthly income is less than this amount, then you automatically pass the means test. If your monthly income is above the median income, you must do further calculations.

Start by deducting your monthly expenses from your monthly income to determine your average disposable income. The amount you have left over can help experts to determine whether you have enough to start repaying unsecured debt.

You can learn more about the means test with Form 122A-1 and 122A-2.

Chapter 13 Bankruptcy

If you do not pass the means test to qualify for a Chapter 7 bankruptcy, you may want to consider filing for Chapter 13. This method helps you to develop a payment plan to repay your creditors in full or in part over the course of three years or five years.

The specific timeframe for your repayment will be based on your income. If your income is below the state median, you can often select a three-year repayment plan.

If you qualify for a Chapter 7 bankruptcy but prefer to file as Chapter 13, your repayment plan will be just three years. Higher incomes typically require a five-year repayment plan. You can learn more about income qualifications on Form 122C.

Sometimes, you may want to consider filing for both a Chapter 7 and a Chapter 13 bankruptcy. This is the case when you have certain debts that cannot be wiped clean with a Chapter 7 bankruptcy such as:

  • Missed mortgage payments
  • Child support or spousal support
  • Money owed to the government including income taxes
  • Personal injury or death award due to drug or alcohol intoxication
  • Overpayment of government benefits
  • Federally-backed student loans

These are known as priority debts and should consequently be given priority during the repayment plan.

A priority debt includes money owed to the government or to the greater good. Other unsecured debt such as credit card debt, medical bills, and personal loans are not given the same treatment.

These can usually be discharged with a Chapter 7 bankruptcy if you qualify.

When Should You File for Bankruptcy?

The simple answer is that you should consider filing for bankruptcy when you are under a tremendous amount of debt and you can’t keep up with the payments.

You might be behind in your mortgage payments. You may flinch every time the phone rings because you just know that it is another bill collector calling to harass you for money.

No matter what your specific problem is, bankruptcy might be the answer if you are financially overwhelmed.

Keep in mind that there are a lot of drawbacks to filing for bankruptcy. Before you make any major decisions, you should reach out to your creditors to see if they are open for negotiations.

Many lenders are willing to help you catch up on missed mortgage payments, set up a repayment plan for medical debt, or can lower the interest rate on your credit card debt to help you catch up a bit.

Pros and Cons of Filing for Bankruptcy

As with anything, there are advantages and disadvantages to filing for bankruptcy. Let these guidelines help to inform your decision-making process.


Bankruptcy might seem like you have finally been given a clean slate. While there are drawbacks to filing, there are certainly advantages as well. Take a look at some of these benefits to see if any of them resonate with you.

Discharge Obligations

If you qualify for a Chapter 7 bankruptcy, there is some relief in knowing that you can discharge some of your debts. This means that you will no longer be responsible for certain debts, and the creditor cannot take any further action to collect what you owe them.

After being financially overwhelmed for such a long time, having respite from bill collectors and collection agencies can feel quite peaceful.

It comes at a high cost, but you can start with a clean financial slate where you can finally learn to live within your means instead of relying on credit cards and personal loans.

Remember that not all debts can be discharged through bankruptcy. Debts that can’t be discharged include spousal support or child support, student loans, and criminal fines just to name a few.

Even if you only qualify for a Chapter 13 bankruptcy, you can find an equal amount of relief in knowing there is a light at the end of the tunnel. The next few years may be extremely challenging while you work on paying down your debt, but you will feel liberated afterward.

Automatic Stay

One of the biggest reliefs about filing for bankruptcy is that it gives you an automatic stay. This essentially means that creditors must pause acting to collect debts and prevents them from being able to repossess your property in lieu of payment.

Instead of losing your assets, you may actually be able to hold onto them. If you are currently being harassed by creditors, the phone calls and lawsuits should cease once you file.

Are you behind on your mortgage payments? Filing for bankruptcy can put a temporary hold on the foreclosure process.

Chapter 7 bankruptcy will give you an opportunity to get current on your mortgage before it continues to move into the foreclosure process.

A Chapter 13 bankruptcy filing helps you to develop plans to get current and stay in your home throughout the process.

Improved Credit Score

It might sound counterintuitive, but filing for bankruptcy actually has the ability to boost your credit score in the long run.

Both Chapter 7 and Chapter 13 bankruptcies will stay on your credit report for seven to ten years. However, discharging a portion of your debt lowers your debt-to-income ratio, an important factor in determining your credit score.

Keep in mind that this small boost still may not have a tremendous effect on your ability to secure new loans or credit cards as lenders are still liable to see you as a greater risk due to your bankruptcy.

Filing for bankruptcy is a difficult time


The relief from your financial burden might seem too good to be true. Unfortunately, it just might be. The advantages can be appealing, but make sure that you weigh them against the disadvantages before you make your move.

Greater Risk to Lenders

There is no way to come out of a bankruptcy and still present yourself as an appealing candidate for loans and credit cards.

A Chapter 7 bankruptcy remains on your credit report for the next ten years while a Chapter 13 bankruptcy remains there for the next seven years. During this time, you can work hard to improve your credit score by keeping your debt to a minimum and making on-time monthly payments.

Despite your hard work, lenders are still liable to view you as a financial risk when they see the bankruptcy on your credit report.

If you are able to qualify for new loans or credit cards, they are apt to come with higher interest rates and annual fees. The lender has to make sure that they are protecting their own interests by allowing you to borrow more money from them.

Be wary of unsecured credit card offers that come your way after filing for bankruptcy. They are likely to be riddled with fees. While I have never filed for bankruptcy myself, I receive offers in the mail often for new unsecured credit cards.

The offers I receive this way often come with astronomical interest rates and high annual fees just for using the card. Always be sure to read the fine print on any offer, even if you decide not to file for bankruptcy.

Loss of Property

In many cases, your personal property and real estate can be protected from liquidation. It should be noted that this is not always the case though.

If your property does not fall under an exemption, you could lose some of your assets or real estate. The property may be seized in order to sell it and pay off a portion of your debt to satisfy your creditors. Property that is not exempt from liquidation includes:

  • Collections that contain some valuable such as coins or stamps
  • Family heirlooms with value
  • Cash on hand, bank accounts, or investments
  • Second vehicles or homes

Typically, you are allowed to keep items that you need for daily life including:

  • Cars up to a certain value
  • Clothing
  • Household goods and appliances
  • Jewelry (under a certain value)
  • Pensions
  • Tools required for your trade or profession
  • Public benefits or assistance

Difficulty with Housing and Employment

You might have already gathered that obtaining a new mortgage will be difficult. Lenders view you as a financial risk and may not be willing to float you a substantial loan to purchase a new house.

This is particularly true if your previous home moved into foreclosure. However, most people do not realize that renting can be equally challenging after filing for bankruptcy.

A landlord wants to be certain that you can be counted on to pay your rent on time. During the initial application phase, they may ask about any bankruptcy filings you have had in the recent past.

You may find that a landlord is hesitant to rent to you at all or they may require more from you. For example, they may require a larger security deposit, two months of rent upfront, or a cosigner for your lease.

Finding a new job may also be a bit more challenging if you work in a position that deals with finances or management of finances.

Companies want to see that you are responsible with your personal finances before putting you in charge of their own. A bankruptcy on your record could affect your chances of getting that new job or a promotion.

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Tips for Navigating Bankruptcy

Once you know exactly how bankruptcy might affect your finances, it’s time to take on the monumental task of preparation.

Navigating these uncertain avenues can be a bit tricky without a little guidance. Here are a few expert tips to help you come to terms with your bankruptcy and smooth out the process.

Make a List of All Debts

Whether you decide to file for bankruptcy on your own or with an attorney, you need to know exactly what you owe and to whom.

This process can feel embarrassing and shameful, but you need to be honest upfront. Consider all of your student loan debt, missing house payments, credit card debt, child support payments, and anything else that you can think of.

This is also a great time to check your credit report. You can view a copy of your credit report for free each year through

This is the time to review it for accuracy including who your creditors are and how much you owe them. I like to check mine every year just to ensure that all of the information is up-to-date. If it is not, then you may need to file a dispute to get it corrected prior to filing for bankruptcy.

Learn to Budget

Many people end up filing for bankruptcy because they borrow more than they can repay. You may have become comfortable relying on credit cards to fund lavish vacations, nights out on the town, or even to cover the basic necessities.

Perhaps you bought a car that was more than you can afford or your mortgage payment has you feeling strapped for cash. This is a great time to learn how to budget your finances accordingly.

When you file for bankruptcy, you are often required to complete mandatory credit counseling courses.

Pay attention during these classes so that you can benefit from the information they are teaching. Upon completion, make your own budget with categories for each expense and how much you can afford to spend.

I made my first budget shortly after moving into my own place at eighteen. If I look back at it now, I know it was hardly accurate.

I had no idea what I was spending and I’m sure that there was a reason why my bank account never had any money left in it at the end of the month. As I grew more experienced with budgeting, I learned to comb through my bank statements to see where my money was really going.

It helped me to see areas that could be trimmed and to budget better for the following month.

Consider Hiring an Attorney

Handling your own bankruptcy is possible, but it can often be confusing and overwhelming. An attorney can help you to fill out all of the paperwork and come up with a reasonable settlement with your creditors.

If you are filing a Chapter 7 bankruptcy, you may need to come up with the funds before filing. A Chapter 13 bankruptcy offers a little more leniency, and you can often pay an upfront portion and finance the rest as part of your repayment plan.

Expect to pay between $1,000 and $6,000 for an attorney depending on what type of bankruptcy you will file for and the complexity of your case.

When hiring an attorney, I always make sure that I feel comfortable with them. I consider things beyond their rate such as their responsiveness.

Do they answer my questions fully and do they return my phone calls in a timely manner? I want to do business with someone who has a polite and respectful staff, no matter why I’m consulting an attorney.

Look for someone with positive client reviews instead of just the cheapest pricing.

Is Bankruptcy Right for You?

There are no clear guidelines about when bankruptcy is the best option for you. You might be tens of thousands of dollars in debt and feel crushed by the weight of it all.

If you are struggling to stay above the surface of your debt, then it may be time to consult an attorney to see what your best options are.

Bankruptcy can certainly give you peace of mind and a break from the nagging calls of debt collection agencies.

I know when my bill went into collections, I stressed about it for weeks until I was able to scrape up the cash to pay it. My creditors were merciless about collecting their money.

While I never filed for bankruptcy, I had to budget accordingly to make sure that I had funds available to pay the bill as quickly as possible. For the future, I made sure that I stashed away a healthy savings account as an emergency fund so that I never got into that situation again.

Bankruptcy could be a good thing for you because it gives you an automatic stay on your debt and can even discharge some of what you owe.

In the long run, it can improve your credit score and make you a bit more appealing to lenders once the bankruptcy no longer shows up on your credit report in seven to ten years.

However, bankruptcy can really do a number on your credit, as well. It remains on your credit report for years afterward, making it hard for you to secure new loans or lines of credit.

You may even face challenges with finding a new rental, a promotion, or landing a new job depending on what field you work in.

There are a lot of things to consider before filing for bankruptcy, but be sure to take an honest look at your finances. Determine how much discretionary income you actually have each month and how it could be allocated to pay down your debt, if it is possible at all.

Make a list of your debt and form a realistic budget before contacting an attorney.

With a little bit of preparation and savvy financial planning, you can decide whether this major move is right for you.

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Ashley Simpson Author

Written by Ashley Simpson

Ashley Simpson has been a writer and personal finance connoisseur for almost a decade. While she definitely categorizes herself as a saver – not a spender – you will often find her splurging on a good cup of coffee!

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