You’ve tried everything, but the debt keeps piling up and life keeps throwing you curve balls. You’re desperate for a way out—so you’ve decided you need to file for bankruptcy.
But bankruptcy isn’t a decision to make lightly. Not only is the process complicated and time-consuming, but it’s also emotionally exhausting. We’ll talk you through what you need to know about filing for bankruptcy, so you can be as prepared as possible.
Before Filing for Bankruptcy
We’re not going to lie—bankruptcy is messy. Think of it like a really bad financial breakup. So, before you file for bankruptcy, it’s important to know exactly what you’re getting yourself into. Here’s a rundown of the bankruptcy basics so you can make the best decision for your situation.
What is bankruptcy?
Bankruptcy is a court proceeding where you tell a judge you can’t pay your debts. The court takes a look at your income, how much you owe, and how much you own to decide if you can pay back your creditors (aka the people you owe money to). Depending on your situation, the judge may decide to discharge (erase) your debts, or they may set up a plan for you to pay some or all of the money back.
Take control of your money with a FREE Ramsey+ trial.
Even though bankruptcy can stop the repo man from taking your car, collectors from taking money out of your paycheck, or even the bank from foreclosing on your house, it doesn’t make all your problems go away. For starters, just because you file for bankruptcy doesn’t mean your debts will be cleared. Cases get dismissed all the time. And there are some debts that bankruptcy doesn’t wipe out, including:
- Student loans
- Government debts (taxes, fines or penalties)
- Child support and alimony
So, if those are the kinds of debt you have, bankruptcy isn’t your answer. Plus, a bankruptcy can stay on your credit report for up to 10 years, which may keep you from getting a job, taking out a mortgage, or starting a business. Even if it seems like bankruptcy will give you a “fresh start,” the cost might be more than you’re willing to pay.
Am I ready to file for bankruptcy?
Before you run to the nearest courthouse, you need to be 100% sure bankruptcy is the right choice for your financial situation. Many people panic and file as soon as the debt collectors start calling. But bankruptcy is rarely your only option.
Listen, we’re not saying you’re a bad person if you file for bankruptcy. Lots of good people end up in tough situations. But bankruptcy isn’t pretty. It’s a gut-wrenching experience that lays out your money problems for all to see and drags you through the legal mud. You might as well put it in the same category as divorce—you should do everything in your power to avoid bankruptcy.
If you’re deep in debt, the first thing you need to do is get aggressive about paying it off. We’re talking yard sales, second (and third or fourth) jobs, major lifestyle changes, and a good budget. So, don’t even think about bankruptcy until you’ve tried every other possible route first.
If you’re at the point where you’re filing for bankruptcy, it really should be your last resort.
Which type of bankruptcy should I file?
Chapter 7 and Chapter 13 are the most common types of bankruptcies for individuals. In a Chapter 7, most of what you own (with some exceptions) is sold to pay back what you owe to creditors. The only way to guarantee that you get to keep your house, car or other assets is to reaffirm the debt—which means you agree to keep making payments on them. Most, if not all, of your unsecured debt (like medical bills and credit cards) is cleared. But before you can file for Chapter 7, the court first has to decide if your income is too low to pay back your debt (this is called the means test). And a Chapter 7 bankruptcy usually takes a couple of months from start to finish.
With a Chapter 13 bankruptcy, you get to keep your stuff, but you also get put on a super tight budget and a court-approved plan to pay back some or all of your debt. The whole process takes about three to five years, so don’t count on your debts being erased right away. Plus, get ready for your whole life to be on display while the court figures out your budget and your pay-back plan.
But no matter what type of bankruptcy you’re looking at, you can expect:
- Expensive filing and lawyer fees
- A mark on your credit report/public record for seven to 10 years
- Trouble qualifying for a mortgage in the future
How to File for Bankruptcy
So, you’ve done everything you can think of to get out of debt, and you’re still drowning. If you’ve realized that bankruptcy really is your only option, then it’s time to get prepared for the legal and emotional battle ahead. We’ll walk you through each step of the bankruptcy process, so you have an idea of what to expect.
Take a deep breath. You’re going to get through this.
1. Gather and organize your documents.
The first thing you need to do is figure out where you stand with your finances. Your money situation is going to be center stage throughout the whole bankruptcy process, so if there were ever a time to be organized, it’s now. Here are some of the documents you’ll need to gather for your case:
List of Your Debts
- Your credit report (Get a copy of your free yearly credit report from each of the major credit bureaus—Experian, TransUnion and Equifax—or on annualcreditreport.com.)
- Medical bills
- Credit card statements
- Records of any personal loans, car loans or tax debts
- Proof that you owe anyone money
List of Your Income
- Tax returns for the past two years
- Pay stubs for the past six months or longer
- Current investment and retirement account statements
- Bank account statements for the past six months or longer
- Proof that anyone owes you money
List of Your Assets
- Real estate documents and mortgage statements
- Vehicle registration and information
- Value of property (List out how much your stuff is worth, especially your car and any real estate you own. You can group other items into categories—clothes, electronics, etc.)
- Property tax exemptions
- Receipts or invoices for any major purchases you made in the last year (appliances, cars, jewelry, etc.)
- Any documented communication you’ve had with your creditors
- Insurance policies
- Any previous lawsuits you were involved in
A bankruptcy lawyer will be able to tell you more about the exact documents you’ll need for your specific situation. But if it’s got to do with your debts, income or assets, go ahead and grab it. And once you’ve gathered your records and made copies, put them in a special bankruptcy file so you can get to them easily.
2. Take a credit counseling course.
Everyone who files for bankruptcy has to take a credit counseling course that’s approved by the Department of Justice. In this course, you and someone from a credit counseling agency will talk about your finances to decide if bankruptcy is really the right choice. Like we said, there may be other options that will help you get back on your feet better than a bankruptcy, and you want to be sure you’re making the best decision for you and your family.
The credit counseling course usually takes about an hour to complete, and you can do it online or by phone. The cost of the course depends on where you take it, but if you don’t make enough money to pay for the course, you can have the fee lowered or waived entirely.1 Once you finish the course, make sure you keep your certificate of completion—you’ll need it when you file.
3. Fill out the bankruptcy forms.
Okay, you made it this far. Now it’s time for paper work (we know, ugh). This is the most mind-numbing step in the process, but it’s important to get everything as exact as possible if you want your case to be approved (and those debts gone). Go ahead and get comfortable, because you’ll have to fill out 23 forms (they’re all free to download here). You’ll also need additional forms based on the state you live in and your specific case. These 70-plus pages ask you about your income, how much you spend, what you owe, what you own, and more. This is where all those documents you gathered in step 1 come in handy.
Now, we’re going to be real with you—there are a lot of details and plenty of math involved in this step. This is when you basically have to prove to a judge that you can’t make ends meet because of your debt. You could choose to file by yourself (it’s called filing pro se), but you’re going to be a lot better off if you have an attorney in your corner.
So, just like you would hire someone to defend you in a trial, you’re probably going to want to hire a lawyer who’s handled their fair share of bankruptcies before. You need someone who can offer expert advice about what to do and help take some of the stress out of the process. If you’re not able to hire a lawyer, try using a bankruptcy software that will help you figure out what forms you need. Some even let you file electronically.
4. Make sure you have your filing fee.
Bankruptcy isn’t cheap. On top of attorney fees, you also have to pay a fee just to file for bankruptcy. The filing fee for a Chapter 7 bankruptcy is $335, and for a Chapter 13, it’s $310.2,3 You’ll have to pay this amount in exact change to the court in person. If you don’t have the money to cover the filing fee, you can ask for a payment plan to space out your fee (up to four payments over 120 days). Or, if money is really tight, you can submit a form asking for the fee to be waived.
5. Print your bankruptcy forms.
When you print out your bankruptcy forms, keep in mind that the court is pickier than a college English professor. Here’s an important rule: Your forms need to be single-sided or the court won’t accept them (and that would mean more work for you and a lot of wasted paper).
Most courts only need one copy of the petition (that’s the section of the bankruptcy paper work that proves you aren’t able to pay back your debts). But some courts want as many as four copies. So, you’ll need to double-check with your local bankruptcy court to nail down the exact number to print out. And of course, you’ll want to save a copy for yourself. After your forms are printed, go ahead and sign them so you’re ready for the next step.
6. File your bankruptcy forms.
Now it’s time to head to your local courthouse and turn in your bankruptcy forms. Not every experience is the same, but here’s a general play-by-play of what you should expect when you go to file for bankruptcy:
After you go through security, head to the clerk’s office (this is the person responsible for handling court records). The only thing you need to tell the clerk is, “I’m here to file for bankruptcy.” This is also when you give them your bankruptcy forms (don’t forget your credit counseling course certificate) and the filing fee in exact change (or the forms for a payment plan or fee waiver, if that’s you).
But wait—don’t leave just yet. Go ahead and take a seat while the clerk processes your case. It usually only takes about 15 minutes or so for them to scan and upload your forms into the court’s system. Then the clerk will give you some important info that you want to hang on to:
- Your bankruptcy case number
- The name of your bankruptcy trustee
- The date, time and location of your meeting with your trustee (aka the meeting of the creditors)
At this point, your bankruptcy case is officially filed. From now until the end of your case, debt collectors are legally not allowed to contact you to collect debts because of what’s called automatic stay. Also, creditors can’t take money directly out of your paycheck, and any foreclosures are put on pause.
But filing your bankruptcy forms doesn’t mean you’re in the clear yet. There are some other key steps you have to take before your debts are gone.
7. Send documents to your bankruptcy trustee.
Once you’ve filed, you should get the name of your bankruptcy trustee. A bankruptcy trustee is someone appointed by the court to handle your case. Sometimes they’re lawyers, but not always. Your trustee will ask you to send them certain documents, like tax returns, pay stubs and bank statements. So, pay close attention to your mail and make sure you do everything the trustee tells you if you want your debts erased.
8. Meet with your trustee (in a meeting of the creditors).
The meeting of the creditors (also known as the 341 meeting because it refers to Section 341 of the bankruptcy code) is when you’ll sit down with your bankruptcy trustee to make sure you didn’t leave out any important info in your paper work—like forgotten debts or assets. The trustee’s job is to make sure everything with your case is correct and your creditors get paid as much as possible. And even though this meeting doesn’t take place in a courtroom, you’re still under oath. So be honest and let the trustee know if there are any changes you need to make to your bankruptcy file. The last thing you want to do is seem like you’re hiding something.
The good news is, this meeting can be pretty short and simple. If you’re filing Chapter 7 bankruptcy, you probably won’t have to go to court at all, so the meeting of the creditors may be the only time you’ll have to actually meet with someone about your case.
The bad news is, your creditors are also on the invite list, but it’s not always a sure thing they’ll show up. If they do, it’s usually to find out if you’re giving up an asset (like a car or boat) or if you’re reaffirming the debt in order to keep it (which means you’re also keeping the payments).
Since you have to sell most of your stuff to get your debts erased in a Chapter 7, your creditors are more likely to show up to make sure they get their piece of the pie. Credit card companies may also join the party to ask about your recent purchases. Because most unsecured debt is erased in a Chapter 7, they want to know if you ran up a bill on purpose—just to get it cleared by filing for bankruptcy. (FYI: That’s called fraud.)
In a Chapter 13 bankruptcy, the 341 meeting is when your trustee ranks your debts to decide which creditor should get paid first. But if the trustee doesn’t think your creditors will be paid enough based on the payment plan you filed, they could object to the plan—which would mean you’d have to go before a judge.
Your role in the 341 meeting may be small, but this is the time for you to ask any questions you have about your case. This is also your chance to file an objection (or a formal complaint) if you feel a creditor has claimed a debt that’s not true. So, come prepared and don’t be afraid to speak up!
9. Complete the debtor education course.
While you wait for your case to be processed, you’ll also need to complete a second bankruptcy course—the debtor education course. Bankruptcy isn’t a trip you want to take once, let alone multiple times. The goal of the debtor education course is to teach you how to make smarter money choices moving forward. The same fees for the credit counseling course apply, but the debtor education course usually takes at least two hours. Remember, you have to complete this course if you want your debts cleared.
10. Finish the bankruptcy process.
You’re almost done! But there are still a couple of things that need to happen before your bankruptcy case comes to a close, and they depend on which type of bankruptcy you filed.
If you filed Chapter 7, your debts will be cleared as soon as your trustee sells your nonexempt assets (those are the ones that were approved to sell when you filed) and pays off your creditors. If you filed Chapter 13, you’ve got to complete the payment plan and make sure all your creditors get their money before your debts can be erased. If you fall behind on payments or don’t stick to the plan, your case could be dismissed, putting you back at square one.
When your bankruptcy case is closed, you’ll most likely get a letter in the mail telling you your debts have been cleared. If you don’t get a letter, you can always contact the clerk’s office, or check your case online if your trustee gave you that option. When your debts are discharged, you’re officially off the hook—you’re no longer legally required to pay back those debts.
But remember, even after your debts are cleared, a bankruptcy stays on your record for up to 10 years. And if you’ve got any secured debt that you reaffirmed (usually a car) or any debt that wasn’t bankruptable (like those pesky student loans), you want to be sure to take care of those ASAP.
Alternatives to Filing Bankruptcy
As you can see, bankruptcy’s no walk in the park, and it could take months or years before you feel any relief. And you may even go through the whole filing process and not even qualify for bankruptcy.
But there are ways to get debt off your back without filing for bankruptcy. The first and most important thing you should do is take care of your Four Walls (and in this order): food, utilities, shelter and transportation. It’s much easier to fight your way out of debt when you’ve got dinner on the table and gas in the tank. Then you want to get intense about upping your income with extra hours or side jobs. You’d be surprised how much delivering pizzas can help you each month!
It’s also time to get rid of your stuff. If you don’t sell your things now, you’ll either be forced to sell them in a bankruptcy or you’ll have to reaffirm the debt to keep them. Anything that’s not nailed down (and even that’s negotiable) is up for grabs. And never underestimate the power of a budget. Taking the time to make a plan for your money can save you some serious cash and help you throw more money at your debt.
If you’re considering filing for bankruptcy, it’s never too late to get help. Start a free trial of Ramsey+ and take control of your finances today! You'll learn how to take control of your money once and for all. Take bankruptcy off the table by learning the best ways to budget, pay off debt, save for emergencies, and build wealth for your future. If you have to take a credit counseling course, you might as well do one that actually works.