Bankruptcy is a legal process that helps people who can’t pay their debts. The rules are the same across the country. It doesn’t matter if you file in New Jersey or Utah—it works the same way.
There are two main types of bankruptcy for individuals or married couples: Chapter 13 and Chapter 7.
Chapter 13 Bankruptcy
If someone is behind on their mortgage and wants to stop the bank from taking their home (called foreclosure), they might file under Chapter 13.
Here’s how it works:
The person sets up a plan to pay back the money they owe on their mortgage, including interest and late fees.
They make these payments every month to a person called a Chapter 13 Trustee.
This plan usually lasts up to 5 years (or 60 months).
The person must also keep paying their regular monthly mortgage on time.
If they follow the plan, their mortgage will be up to date after 5 years, and they keep their home and other property.
The cost to file a Chapter 13 case is $313.
After making all the payments:
The person is no longer responsible for other debts they couldn’t pay.
They can go back to paying their mortgage like before.
Note: The Trustee keeps 10% of the monthly payment as a fee. So, if someone pays $500 a month, they’ll need to pay an extra $50 to cover the fee.
Chapter 7 Bankruptcy
Chapter 7 is for people who can’t pay most or all of their debts. This type helps erase debts, but the person may have to give up property that’s worth a lot of money.
Important things to know:
All debts and assets need to be listed in the Bankruptcy Petition.
The cost to file is $338. Some people can ask to have this fee waived.
If someone owns something very valuable, like a house with over $31,575 of equity for a single person or over $63,150 for a couple filing jointly or a new car, they might have to give it up.
Most people keep their things because they don’t own anything too valuable.
Before filing:
The person must take a credit counseling class approved by the court.
This class must be taken within 180 days before filing, or the case will be denied.
After filing:
The court will give the case a number.
A video meeting will be scheduled where the person and their lawyer (if they have one) must attend.
The person must show proof of income from the past 60 days and two years of federal and state tax returns at least 10 days before the meeting.
It’s not required to have a lawyer, but it’s a good idea.
After the meeting:
The person must take a debtor education class and give proof to the court within 60 days.
Creditors (the people or companies owed money) have 60 days to say if they think the debt should not be erased.
Example: If the person never meant to pay back the money or lied to get the loan.
If no valid objections are made:
The court will send an Order saying the person doesn’t have to pay their old debts anymore.
Other Important Info:
Once someone files for bankruptcy, creditors are not allowed to try to collect money from them anymore.
If someone wants to keep paying for something (like a car loan), they can—but they must tell the court.
The judge will decide if the person can afford the payments.
The person has 60 days to cancel this payment plan if they change their mind.
Filing Again:
After getting a discharge (meaning your debts are erased), you must wait 8 years before you can file again.
Common reasons people file for bankruptcy include:
Divorce
Medical bills they can’t pay
Losing a job or having their income reduced
Credit Report:
A Chapter 13 bankruptcy will stay on a credit report for 7 years, and a Chapter 7 for 10 years. Credit reports will show the chapter number and the filing date.
