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What is Bankruptcy? Definition, Types and What to Know

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What Is Bankruptcy? Definition, Types and What to Expect

Are you facing an overwhelming amount of debt, but you aren’t making progress? Bankruptcy may be the tool you need to climb over the hurdle.

by Sean Pyles Senior Writer | Personal financial and debt Sean Pyles leads podcasting at NerdWallet as the host and producer of the NerdWallet’s “Smart Money” podcast. The show “Smart Money” Sean talks with Nerds from NerdWallet’s NerdWallet Content team to answer listeners’ personal finance questions. With a focus on thoughtful and practical money tips, Sean provides real-world guidance that will help people improve in their finances. Beyond answering listeners’ money concerns on “Smart Money,” Sean also interviews guests who are not part of NerdWallet and also creates special segments that explore subjects like the racial inequality gap and how to begin investing and the history for student loans.

Before Sean lead podcasting at NerdWallet He also covered issues that dealt with consumer debt. His writing has been featured throughout the media including USA Today, The New York Times as well as other publications. When he’s not writing about personal finances, Sean can be found playing in the garden, taking walks, or taking his dog on long walks. He lives at Ocean Shores, Washington.

April 25, 2022

Edited by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. Previously, she spent 18 years working at The Oregonian in Portland in positions such as copy desk chief and team leader for design and editing. Previous experience included copy editing and news for many Southern California newspapers, including the Los Angeles Times. She earned a bachelor’s degree in journalism and mass communications at the University of Iowa.

Many or all of the products featured here are provided by our partners, who pay us. This impacts the types of products we review and where and how the product appears on a page. However, it does not affect our opinions. Our views are our own. Here’s a list of and .

Key lessons to take away

The bankruptcy process is a legal instrument to aid businesses and customers resolve overwhelming debt. It’s a complex process best handled with the assistance of an attorney.

Chapter 7 and Chapter 13 are the two most frequently used for consumers, while Chapter 11 is typically used for businesses.

It may be a good idea to file for bankruptcy in the event that your non-mortgage total is greater than 40% of earnings and the path to pay it down is unclear.

Bankruptcy will hurt your credit and will remain with you for years, but you can get back your credit score in as little as several months.

There are various solutions to debt relief that you could consider such as a .

How do you define bankruptcy?

Bankruptcy is a legal process which can offer relief to those who are struggling to pay back the debts. Depending on the type of bankruptcy filed, people are able to wipe out a certain amount of unsecured debt or enter a repayment plan with better repayment terms.

A bankruptcy filing puts an end to the phone calls, debt litigations and . The process can be complicated, and hiring an attorney is advisable, but you’re likely to observe some aspects of your finances improve within six months of filing. Note that some debts, such as student loans or recent tax payments and child support generally cannot be eliminated in bankruptcy.

What are the various types of bankruptcy?

The two most common kinds that are used for consumer bankruptcy . Chapter 11 bankruptcy is typically used by businesses.

Here’s the full breakdown:

Chapter 7 bankruptcy

It is also known as “liquidation” because the majority of unsecured debts are forgiven this is the fastest and most popular type of bankruptcy.

The best option for consumers who have primarily unsecured debt for example, medical bills, credit card debt or personal loans.

Eligibility

The test must be passed test which determines whether you qualify to file Chapter 7.

Could not have received an Chapter 7 discharge or a Chapter 13 discharge in the last six years.

Do not have to have filed bankruptcy within the last 180 days and it was dismissed due to your failure to appear in court or adhere to the court’s orders or you decided to dismiss your own bankruptcy petition due to creditors seeking court relief to retrieve their liens on.

Chapter 13 bankruptcy

It is also known as known as a “wage earners” bankruptcy, it allows debts to be restructured into a repayment plan spread over three to five years.

Ideal for: People with assets they would like to keep, such as expensive jewelry or secured debts they wish to keep up to date, like a mortgage.

Eligibility

You must have regular income.

You must be current with tax returns.

You for Chapter 13 in the past two years or Chapter 7 within the last four years.

You cannot have filed bankruptcy in the past 180 days and was dismissed due to certain circumstances, such as failing to appear in court or follow the court’s orders.

Chapter 11 bankruptcy

Called called a “reorganization” bankruptcy This chapter is usually utilized by companies and other businesses.

Ideal for businesses that want to keep operating.

Eligibility

Cannot have filed bankruptcy within the last 180 days and it was dismissed because you failed to attend court or follow any court order, or decided to dismiss your own bankruptcy petition because creditors sought court relief to retrieve their liens on.

Is bankruptcy the right choice for you?

Filing for bankruptcy is never an easy decision You’ll need consider the pros and cons of the long-term consequences on your debt and credit. But in general, if:

There’s no way to pay off your debts in five years.

Your total debt (excluding any mortgage) is more than 40% of your income.

You’re paying the most you can towards your debts but not making progress.

The burden of debt is preventing you from meeting the other goals of your finances, like savings for your retirement.

If you’re considering bankruptcy and want to know more, you can get free consultations with a bankruptcy attorney and a to better understand your financial situation and determine if bankruptcy is the best option.

Do you need a bankruptcy attorney?

The quick answer is: Yes.

The bankruptcy process can be a lengthy and complex procedure. If you fill out the wrong form, it could result in the dismissal of your case. That means that you will have to wait six months before filing again. To help you navigate the process and ensure that your paperwork is completed correctly.

A word of caution when you’re contemplating filing without an attorney: Bankruptcy data shows that only 1.4 percent of Chapter 13 bankruptcy cases filed without an attorney in 2012 got an discharge, which means the case was closed and eligible debts forgiven in accordance with the Federal Judicial Center.

Of Chapter 7 bankruptcy cases filed with an attorney in 2012, 95% of them were successful in resolving as opposed to the two-thirds of cases that were that were filed without an attorney according to the data of the center.

A lot of bankruptcy attorneys will demand payment before filing, but you have options to help .

How long is bankruptcy a record for on the credit reports of your clients?

Filing for bankruptcy is the most destructive thing you can cause to your credit score because it .

But there is a bright spot: Your credit can start to improve after a few months of filing, and the change may be especially marked when you’re already in default in your loans.

A 2014 report by the Federal Reserve Bank of Philadelphia found that those who filed Chapter 7 bankruptcy saw their scores rise from 538 on average and an average 600 on a scale of 300-850 when the case was discharged which is usually within six months.

There are other steps you can take to help .

Learn: Canadians?

What are the alternatives to bankruptcy?

Depending on the kind and amount of debt you have, you may have other alternatives to help you pay off your debt.

Utilize this calculator to investigate your debt relief options, such as a debt management plan from a nonprofit credit counseling agency Do-it-yourself strategies, consolidation and.

Be aware of where every penny is going to

Find ways to spend your money on things you enjoy, and less on the things you don’t.

The author’s bio: Sean Pyles is the executive producer and host of NerdWallet’s Smart Money podcast. His writing has been featured in The New York Times, USA Today and elsewhere.

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