How to File for Personal Bankruptcy

A Step-By-Step Guide

Filing for bankruptcy is often the last resort for people who have become encumbered by debt and unable to repay it without the court stepping in. Bankruptcy offers solutions available by no other means and can be a lifeline for debtors drowning in debt. Unlike debt settlement or consolidation, bankruptcy gives debtors protection of the US Court System to force creditors to remove their claims and give the petitioner a clean slate.

It’s not all peaches though, as bankruptcy has its downside. The bankruptcy will remain on the petitioners’ credit history for seven to ten years, and will lower their credit score by about 50 points. However, for people unable to repay debts, credit is likely going to go downhill anyway.

This guide will walk you, step by step, through the bankruptcy filing process. Before the bankruptcy petition can be filed though, there are a couple of things a debtor must accomplish.

First, a certificate must be obtained showing that the mandatory pre-bankruptcy counseling has been completed at an authorized credit counseling agency.

Pre-Bankruptcy Counseling and Debt Repayment

Anyone thinking about bankruptcy must first attend the mandatory bankruptcy counseling session. These sessions usually take between one and two hours and are designed to educate debtors about the bankruptcy process, finances and credit usage.

However, the real motive behind pre-bankruptcy counseling is to find out if bankruptcy can be avoided.

Debt Repayment Plan

Every attendee with a steady income at the pre-bankruptcy counseling session will be encouraged to avoid bankruptcy, and adhere to a repayment plan instead. While, for some people, the repayment plan is a good option, it is critical that debtors be absolutely certain they can stick to it within their budget.

Far too many people are convinced during the pre-bankruptcy counseling that they can repay their debts without bankruptcy, and end up filing for bankruptcy anyway. They end up repaying debts that could have been avoided if they were more realistic about their finances in the beginning.

Chapter 7 vs. Chapter 13 and the Means Test

Choosing between chapter 7 and chapter 13 is usually less of a choice, and more of an issue of eligibility requirements. While chapter 13 has many advantages over chapter 7, chapter 7 is much faster, simpler, easier and the choice for most personal bankruptcy petitioners.

Means Test

Take the Test

Table of Median Household Income (Census 2008)

Click Image for Example

In 2005, changes to the bankruptcy laws created a new requirement for filing chapter 7 called the means test. Prior to this change, bankruptcy filers were free to choose the type of bankruptcy that seemed best for them, and most chose chapter 7. However, with the introduction of the means test, those petitioners with a net income higher than the median in their state will have to pass the means test or otherwise prove to the court that they are not abusing the chapter 7 laws, otherwise they must file for a chapter 13 repayment plan.

Check Your Income

Click on the chart to the right to see how your income compares to your states median. If your income is significantly higher than your states median, you will have to pass the means test (more on that on the next page) or petition the court to allow you to file for chapter 7, otherwise chapter 13 will be necessary.

Chapter 7 vs. Chapter 13

Chapter 7 is the easiest and quickest means of removing ones debts, and allow a debtor to be discharged of all debt within two to three months. A chapter 13 bankruptcy, on the other hand, is much more complicated and involves the development of a repayment plan to which the debtor must adhere for three to five years before the discharge is completed.

Below you will find a quick comparison of chapter 7 bankruptcy vs. chapter 13 bankruptcy.