How Long Does it Take to File for Bankruptcy?
When it comes to filing for bankruptcy, the entire process takes about six to eight months to complete from start to finish. However, there may be some factors that can delay or even prevent you from filing, so timing may vary slightly depending on your specific case.
Introduction to Bankruptcy
Bankruptcy is a legal process in which an individual or company can declare themselves insolvent and receive a discharge order of all their debts. It’s an effective way to reorganize finances and get back on track.
However good this may sound, it’s not all roses, filing for bankruptcy does have its downsides too (more on this below).
There are several steps involved in filing for bankruptcy so the total time required from start to finish will be different in each situation, some chapters will take longer than others, and some creditors may object to the discharge making the process take longer.
Chapter 7 is the fastest and most common way to declare bankruptcy in the United States. Most people opt to file under chapter 7 bankruptcy because they have unsecured debt such as credit card debt, personal loans, or medical bills that won’t be discharged in other types of bankruptcies.
The Different Chapters of Bankruptcy
There are a few different chapters of bankruptcy, each with its own set of rules, requirements, and end goals. The most common chapters of bankruptcy are:
Chapter 7 – The most common type of bankruptcy in the United States and also the most flexible. It allows the debtor to keep “bankruptcy exemptions” by protecting assets that fall under this category from creditors, e.g. inexpensive car, retirement account, clothing, etc. Chapter 7 is often called the “liquidation bankruptcy”, a bankruptcy trustee assigned by the court will take charge of liquidating your nonexempt assets, and then make sure creditors are paid off according to pre-determined priority rules.
Chapter 13 – Unlike chapter 7, chapter 13 is a more traditional type of bankruptcy. Instead of liquidating assets to pay off debt, it allows the debtor to keep their property and repay the debt over an extended period of time, typically between three to five years. Chapter 13 is also known as “the wage earner’s bankruptcy”, it is often filed by people who have significant income and assets but still struggle to pay off their debt. The debtor must meet the requirement of earning enough to cover the debt in order to file for Chapter 13.
Chapter 11 – The most complex of all types of bankruptcy and also the most expensive. Widely known as “the reorganization bankruptcy”, chapter 11 is typically filed by corporations that require time to restructure the payment of the debt without shutting down the business. It allows these corporations to keep operating as usual and avoid liquidation, as well as proposing a repayment plan to pay the creditors. To file for Chapter 11 bankruptcy, the corporation must have a solid business plan and must be able to prove that the organization will cease operation without it.
Eligibility to File for Chapter 7 Bankruptcy
According to the United States bankruptcy code and U.S. Courts, the debtor may be an individual, a corporation, a partnership, or other kinds of business entities to be eligible to file for chapter 7.
The debtor can seek debt relief under chapter 7 bankruptcy regardless of being solvent (assets outvaluing the debt) or insolvent (debt exceeding the value of assets).
A debtor will be automatically ineligible to file for chapter 7 or any other chapter of bankruptcy if there was a previous petition in the last 180 days that was dismissed. Either due to voluntary disregard of court orders or willful request for dismissal granted by the court. (The debtor, trustee, or creditor can request a dismissal).
Although corporations can file for chapter 7 bankruptcy, it’s not a frequent or beneficial occurrence because businesses are not eligible to receive debt discharges under chapter 7.
Chapter 7 bankruptcy process serves the purpose of giving individuals a debt-free fresh start, therefore, debt discharges under chapter 7 are only available to individuals and not to corporations or partnerships.
If you’ve decided you want to file for chapter 7, then completing a pre-bankruptcy credit counseling course before filing is mandatory by law if you’re filing as an individual. It’s also needed to take a pre-discharge financial counseling course during the case in order to obtain the debt discharge.
Do I Need a Bankruptcy Attorney to File for Chapter 7 Bankruptcy?
You can file for chapter 7 without a bankruptcy attorney, this is called filing pro se. However, due to bankruptcy’s complicated financial and legal implications, it’s strongly recommended to seek legal consultation.
Filing for bankruptcy requires meticulous attention to detail and a deep understanding of legal issues. Court employees or any bankruptcy judge are prohibited by law to offer legal advice so you’re better off hiring an attorney to make sure your rights are not affected by any lack of knowledge.
How to File for Chapter 7 Bankruptcy
The first step in filing for bankruptcy is gathering documents. The packet of these financial documents is often called a “petition“. This must then be filed with a bankruptcy court serving the area where you live or where your business operates.
In order to assemble a successful petition, the following documents are required by the bankruptcy court:
- Schedule of assets and liabilities
- Schedule of current income and expenditures
- Statement of financial affairs
- Schedule of executory contracts and unexpired leases
You must also provide the most recent copy of your tax return, as well as any tax returns during the case.
Individual debtors filing for chapter 7 bankruptcy with primarily consumer debts have additional documentation to be delivered, they must also file a:
Certificate of credit counseling
Copy of any debt repayment plan
Record of payment from employers in the last 60 days (if applicable)
Statement of monthly net income
Statement of anticipated increase in income or expenses after filing
Record of any interest in federal or state qualified education or tuition accounts
The following information must be provided along with the previous documents:
A complete list of all creditors and the details of the amount owed
Details of income: Source, amount, and frequency
A list of all owned property
Detailed monthly living expenses (everything)
If among the owned property there are exemptions, you must also file a schedule of exempt property. This will protect property that falls under the federal bankruptcy law or the laws of your home state from creditor claims.
Many states have adopted their own exemption law in place of federal exemptions. In some jurisdictions, the individual debtor has the option to choose between state-specific or federal exemption laws. You should consult an attorney in order to collect information on your state exemptions law.
Regarding bankruptcy and married couples, married individuals filing a petition without their spouse will still have to present sensitive or confidential information of the non-filing spouse so the court can assess the household’s financial stance.
A married couple may file a joint petition but even when filing jointly, the couple is subject to all the documentation requirements of individual debtors.
For last, bankruptcy forms are not available to be picked up in courts. They may be purchased at certified stationery stores or downloaded from the official U.S. Courts website.
2. Filing costs
Filing costs are paid directly to the court clerk during the act of filing. The following costs are to be expected:
- Case filing fee – $245
- Miscellaneous administrative fees – $75
- Trustee surcharge – $15
You may pay the filing costs in installments (limited to 4) whenever the court grants permission to do so. But no matter how you settle the installments with the court, the last one must be paid up to 120 days after filing the petition.
For joint petitions, filing costs are the same as individual petitions.
Whether you’re filing individually or jointly, failing to pay the filing costs may result in the dismissal of the case.
If your income is under 150% of the U.S. poverty level and you’re unable to pay the fees even if in installments, the court may opt to waver the fees.
3. Filing the petition
Make sure to have all the required documents in your possession so you don’t waste any time.
Once you’re in bankruptcy court and past security procedures, you can go to the clerk’s office and let the clerk know you want to file for chapter 7 bankruptcy.
Then, you can deliver the petition and pay the fees at once (or present an application to pay the fees in installments or to completely waive the fees).
The clerk should take no longer than 15 minutes to process your case, assuming there are no missing documents and everything goes well. You’ll then be assigned your:
Bankruptcy case number
The name of the case trustee
Location, date, and time of your 341 meeting of creditors
Congratulations, your case is now successfully filed. “Automatic stay” provision will temporarily prevent debt collectors from pursuing you in regards to owed debt for as long as the case is ongoing. And any debt collectors violating this provision can be sued.
What Happens After Filing for Bankruptcy?
The trustee will overview your bankruptcy case and check if everything is in order. If there’s any documentation still missing after you file, the trustee may ask you for such documents. You are obliged to cooperate with the trustee throughout the bankruptcy process, failing to do so may result in your case being dismissed.
The court will notify the entities you’re in debt with and the “Automatic stay” provision will be effective immediately after you file for bankruptcy, creditors can no longer take action to collect payment from you. This provision will protect you from wage garnishments as well.
1. 341 Meeting
Your case trustee will call a meeting of creditors (also called a 341 meeting) which takes place between 20 to 40 days after filing. You’ll be asked about your assets and debts while under oath. Creditors are welcome to attend this meeting and ask you questions but they typically don’t, oftentimes it’s just held between the person filing and the trustee.
1.1 – Credit Counseling Course
Attending pre-filing and pre-discharge credit counseling is mandatory. Debtor education will give you a financial foundation to work upon and get back on track once you’re granted debt relief. You’ll learn about your credit score, managing your income, and how to avoid risky financial behavior.
1.2 – Credit Score
Chapter 7 bankruptcy will stay on your credit report for the next 10 years after the filing date. In addition to this, your credit score will take a big hit.
Usually, a drop between 100 to 200 points happens.
The good news is that this drop is to be expected and assuming you’re filing out of legitimate necessity, your credit score will probably not be the best to start with.
1.3 – Liquidation Process
The bankruptcy trustee will initiate the process of liquidating your “non-exempt” assets. There are no secrets about this step, the trustee will usually take the same steps as you would to sell your property, this means:
Listing the property for sale
Work with a real estate broker
Negotiate the price
As expected, none of these steps are taken by the trustee without proper court approval.
1.4 – Exempt vs Non-exempt Assets
You can think of exempt assets as the ones necessary for basic needs, bankruptcy law allows you to keep these. Some examples are:
Personal vehicles up to a certain value
Necessary clothing, furnishings, and appliances
Tools needed for your profession
Personal injury awards
Public benefits such as welfare or social security payments
Non-exempt assets are any valuable items that can be considered non-essential, the “extras” you can live without. Some examples are:
Expensive items not needed for your profession
Valuable collections of items
Stocks, bonds, and other investments
Second vehicle or any expensive vehicle
1.5 – Debt Discharge
For most filers, the bankruptcy case ends as soon as the debt discharge is granted by the court, typically about four to six months after the case starts. After the final discharge, you’ll no longer be liable for the debt, and lenders are not allowed to attempt collecting from you anymore.
Are There Non-Dischargeable Debts?
Not all kinds of debt are eligible for bankruptcy discharge, you need qualifying debt. Unless under extraordinary circumstances, some types of debt that are automatically non-dischargeable:
Court fines and penalties
Debt coming from child custody cases (alimony, child support, attorney fees)
Debts not listed in the bankruptcy petition
Debt that arose from divorce or separation
But some of these debts are dischargeable in chapter 13.
If the reason you’re filing is that the source of your debt is listed above, make sure to check out which debts are discharged in chapter 13 but not in chapter 7 bankruptcy.
The Benefits of Filing for Bankruptcy
Debt can snowball and become overwhelming very quickly, the reason why you would want to file for bankruptcy is because of the benefits it offers. These benefits include:
Unburdening yourself from debt. In most cases, your debts will be eliminated by court order and you will no longer have to pay them back.
Protecting your assets. Another benefit of filing for bankruptcy is that it can protect your exempt assets from creditors. This means that if someone files a claim against your property, they may be denied access to it.
Getting back on your feet financially After filing for bankruptcy. Many people find themselves with more financial freedom and stability than before. Filing for chapter 7 gives you the ability to start fresh and rebuild your financial future without the burden of hefty debt.
The Disadvantages of Filing for Bankruptcy
Filing for bankruptcy should be your very last resort when you’re facing financial difficulty. The main disadvantages of filing for bankruptcy are:
Bankruptcy traces will show up on your credit report for years after filing
You will not be able to request credit for a while
Not all types of debt are discharged
The Bottom Line
Filing for bankruptcy may seem easy or the best solution to end your financial problems and grant you instant debt relief at first glance.
However, after knowing how much effort goes into the process, you’ll soon realize bankruptcy is an extremely serious decision that should not be taken lightly.
Even after filing for bankruptcy, your case will take some time to be processed and to get a final court decision. You can hire the best attorney and file for bankruptcy, and still see your debt discharge denied by the court after months of waiting.
Be sure the advantages outweigh the disadvantages before making a decision.