If you’ve ever thought of filing bankruptcy, you’re not alone. From 2005 to 2017, about 12.8 million consumer bankruptcy petitions were filed in the federal courts. Bankruptcy can offer a fresh start if you feel overwhelmed with personal debt, but it also poses some common questions you should carefully consider before you file, such as:
- What is bankruptcy?
- What happens when you file bankruptcy?
- What are the types of bankruptcies?
- How much does it cost to file bankruptcy?
Bankruptcy is a legal proceeding when you can’t fully re-pay your debts to your creditors. When you look for answers, make sure you get them from an expert.
Talk to a bankruptcy attorney first.
That’s the number one recommendation from ARAG network attorney Candace Y. Brooks with Brooks & Carpenter in Sacramento, Ca. “Before you do anything, at least have a consultation with an experienced bankruptcy attorney,” she advises. “Most attorneys will provide an initial consultation for free. That conversation may save you from making some expensive mistakes.”
Too often, Brooks explains, people take bankruptcy advice from friends and family. And although they likely mean well, friends and family may not have the expertise needed to give you the best guidance when it comes to filing for bankruptcy.
What else do bankruptcy attorneys wish people knew? Here’s what Brooks has learned from her years of working on bankruptcy cases.
Re-think transferring assets.
“One of the things I see people do is transfer an asset — like a car or a house — to someone else before they file bankruptcy,” says Brooks. “Their goal is to protect the asset. Unfortunately, though, doing this may actually make protecting the asset impossible.”
There are laws that may help you protect certain assets during bankruptcy. But if you transfer an asset into someone else’s name first without selling it for fair market value, those laws can’t help you. That’s because the trustee could legally undo that transfer and go after the asset during the bankruptcy process.
Bankruptcy is a time-consuming process.
A lot of people think bankruptcy is pretty simple, according to Brooks. “Most people think they have an ‘easy’ case and that bankruptcy just involves filling out a few forms. But they don’t understand the complexity of bankruptcy laws. There are a lot of different issues involved, and how you handle those issues can have a big impact on you financially,” she says.
You’ll also need to gather a lot of documents when you declare bankruptcy. And this usually isn’t something your attorney can do for you.
Brooks says, “You’ll need to provide many different records — along with supporting documents — to the trustee when you file for bankruptcy. This can include copies of tax returns, pay stubs for the last six months, records on any other sources of income, bank statements, loan statements, credit reports and more. And if you don’t have all of the records, they can kick your case out of court.”
You can still get loans.
Some people think their credit will be ruined forever once they file for bankruptcy. “People assume they won’t be able to buy a house or a car,” Brooks explains. “But that’s not true. A lot of people buy cars and homes after bankruptcy. It may take some time to rebuild your credit if you want a lower interest rate. But you can usually get a loan fairly quickly as long as you’re willing to pay a higher interest rate.”
Filing for bankruptcy will cost you.
A certain irony exists for anyone who is considering bankruptcy as a way to relieve their debt woes: filing for bankruptcy will cost you. According to the United States Courts:
- Filing fees for new petitions for Chapter 7 bankruptcy (a liquidation bankruptcy designed to wipe out general unsecured debts such as credit cards and medical bills, when you have little or no disposable income) is $335.
- Filing fees for Chapter 13 bankruptcy (a reorganization bankruptcy where you earn a regular income and can pay back at least a portion of your debts through a repayment plan) is $310.
In addition to the filing fee, you’ll be required to take credit counseling and a personal financial management course, which incur additional costs. There’s also miscellaneous fees for items such as retrieval of electronic records and the filing of an appeal, to keep in mind.
Then, if you work with a bankruptcy attorney, which is highly advisable in order to help you navigate the financial and legal complexities involved in the process, it could cost you a few thousand dollars of attorney fees.
Do your homework
There isn’t just one type of bankruptcy. There are several different kinds of bankruptcy, including Chapter 7, Chapter 13 and others. A good understanding of those bankruptcy types will help you make smart decisions.
You can’t get rid of all debt.
Bankruptcy doesn’t wipe out all debt. Student loans, for instance, usually can’t be negated by bankruptcy. But you may be able to wipe out more debt than you realize — including tax debt, in many cases.
Don’t feel bad about filing for bankruptcy.
“Many people feel ashamed about filing for bankruptcy,” says Brooks. “Often, though, people get in these situations due to events that are beyond their control — such as a prolonged illness. So don’t let those feelings keep you from filing for bankruptcy if that’s the right move for you.”
