In this post, I want to get into the detailed specifics of bankruptcy, educate you on what it entails and what to expect, as well as answer 20 of the most commonly asked questions regarding bankruptcy. However, before doing so, you first need to determine if bankruptcy is right for you. If you’ve already determined that bankruptcy is your last and only option left, then read on. But, if you are asking yourself if bankruptcy is actually right for you, you MUST read this post first: Should You File for Bankruptcy?

What You Should Know & Expect:

The process of filing for and going through bankruptcy, simply put, is intense. Because you recognize this is your last and only option, just realize at the outset that the legal process takes time, money, and is emotionally, socially, financially, and psychologically difficult (but often necessary).

Below are 20 of the most commonly asked questions, with the answers, about the process of bankruptcy and what you need to know, do, and what to expect. Keep in mind, however, that the two most important questions are:

• How do I know if I should declare bankruptcy, and
• What can I do to avoid bankruptcy?

The answers to these questions are not addressed here, but are addressed in the post: Should You File for Bankruptcy? and 101 Tips for Getting Out of Debt.

1. Should I file Chapter 7 or 13?:

For most people, there are really only two options or types of bankruptcy filings to choose from, chapter 7 or 13.

• Chapter 7: This type of filing, which is total bankruptcy, stays on your credit report for 10 years. The court will take over and sell your assets in order to pay back as much of the debt as possible. This option usually is pursued by those who have no assets to repay any of the debts, and are looking for a quick ‘fresh start.’ If you want to keep a certain asset, or even your home, Chapter 7 is NOT your best option (because you will most likely lose everything).
• Chapter 13: This type of filing, which is more like a repayment plan, stays on your credit report for 7 years. Essentially, the court approves a plan for which you have to repay your debts over time. For those who have assets or property they want to keep, Chapter 13 is your best option. The downside obviously is that you will be required to repay a portion of or the full amount of certain debts, and you’ll spend years having to seek permission to spend your own money.
• Both: Regardless of which type you file, there are some exemptions, and you may get to keep some personal items or even your home (but consult an attorney for specifics). But, regardless of which type you file, you can’t eliminate certain debts and obligations like: child support, alimony, taxes, or student loans.
• Learn More: To learn more about the specifics of Chapter 7 vs. 13, including more specifics of the legal process, please visit: http://www.uscourts.gov/FederalCourts/Bankruptcy.aspx

2. What will happen to my home?

If you file for chapter 7, you’ll probably lose it; if you file for chapter 13, you probably will be able to keep it. In chapter 13, you will not be relieved from your obligation to pay the mortgage, but it may get rid of other debts which will make paying the mortgage much easier. If you keep up with your payments in the repayment plan of chapter 13, you will be able to keep your home. However, even in chapter 7, if the trustee determines that you have a nonexempt property, or the property is not worth very much, the trustee may abandon the property (which could mean you get to keep it). The properties that are exempt vary from state to state, so consult an attorney for specifics.

3. Will I lose my other assets?

What happens to your cars, boat, home equity, etc.? In chapter 7, you’ll probably lose them to pay for as much of your debt as possible. In chapter 13, you may be able to keep your other property, but will have to pay arrears and stay consistent on the repayment plan’s payment schedule.

4. What happens to my credit card debt?

Most likely, bankruptcy will wipe out most credit card debt and unsecured loans.

5. What happens to my pension, IRA, or 401(k)?

As is the case with most of these questions, consult an attorney. However, in most states, you will not lose the money in a pension fund, retirement account, or life insurance policy. In 2005, the Supreme Court stated that federal bankruptcy law protects individual retirement accounts from creditors (read more at: http://www.investopedia.com/articles/retirement/06/BankruptcyProtection.asp)

6. Will my wages be garnished?

In other words, will the court system have access to, control over, and dictate my income and spending? Yes and no! If creditors have already garnished your wages, then yes, bankruptcy will help by ensuring creditors do not have that control any longer; however, in the case of chapter 13 (because you are on a repayment plan), yes, the court system will be extremely involved in the cash flow of your own money.

7. What if I can’t make plan payments?

Let’s say you file for chapter 13 and down the road you lose your job or have a huge medical bill come up, etc. that results in you being unable to stay current with the repayment plan, then the court may either modify your repayment plan, or convert your case to a chapter 7 filing.

8. Will cosigners be stuck with my debt?

Chapter 7 filing will actually make any cosigner ‘pay for’ or be ‘stuck with’ the debt you did not pay. Chapter 13, however, will protect the cosigner.

9. Will My Creditors Stop Harassing Me?

Yes! It is law that creditors must cease contacting the debtor once bankruptcy documents have been filed. Creditors, at that point, can no longer make contact, file lawsuits, garnish wages, or demand payments.

10. Who Will Know?

Technically, anyone can find out. Bankruptcy filings are public records. But, when was the last time you went down to the courthouse to research whether your neighbor has ever filed for bankruptcy? Thus, besides your creditors, the credit bureaus, the court system, and anyone who ever does a background check in the future… the only other people who will know are those you tell.

11. How do I file for bankruptcy?

You can voluntarily file, or your creditors will ask the court to order you bankrupt. Consult a lawyer to figure out the details and process that best fits your circumstances.

12. Will I Ever Get Credit or Loans Again?

Of course. Don’t lose hope. A number of banks actually offer ‘secured’ credit cards. And, a few years after bankruptcy, debtors are eligible for mortgages and other loans, but typically will need a co-signer, a larger down payment, proof of stable income, and will be charged higher interest rates.

13. Will Bankruptcy Stay on my Credit Report Forever?

No, only 7-10 years.

14. Can My Boss Fire Me?

No! The law (U.S.C. Sec. 525) states that ‘no employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a… debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt…” (http://www.law.cornell.edu/uscode/11/525.html).

15. What are the costs?

The answer to this question will be as varied as there are attorney’s and states. However, typically, you can expect to pay roughly $300 to file for bankruptcy, and attorney fees can range from $1,000-$5,000.

16. Do I need an attorney?

No. But it is highly advised that you at least consult with one before moving forward.

17. What if I have to file for bankruptcy again?

The law states that you can file for bankruptcy once every 8 years. But, really, just don’t plan on doing that alright!

18. Can I just max out my cards, or get a loan, and then file?

So what you are saying is that you’ll knowingly go into debt with no intent of repaying? Attorneys and the court system are not stupid, and they will recognize if this is the case. First of all, it is fraud. Second of all (and we won’t go into this), but now we are talking about a moral and ethical issue far more important than the topic of bankruptcy. Don’t do it!

19. What should I do?

As stated at the outset, the first thing you need to do is read and implement the things advised in the article: 101 Tips for Getting Out of Debt. After, and only after, reading and ACTING on those things, then you need to consult an attorney IF you feel bankruptcy is your last and only option.

20. Don’t neglect the basic necessities:

If you are actually at the point of considering or pursuing bankruptcy, and I know this seems like stating the obvious, but NEVER neglect the basic necessities. These necessities are: family, food, and shelter. I would advise EVERYONE to go into bankruptcy before losing your marriage or family. Don’t lose sight of what and who is most important, and if that means bankruptcy in order to keep those relationships, then DO IT. And while financial circumstances may be difficult, never neglect the basic necessities of food and shelter. In other words, NEVER make a payment to a debt or creditor if that means you (or your family) are going to go without food and shelter. Take care of your family first, not your creditors. But having said that, don’t lose sight of integrity as well.

If worse comes to worse, realize that there is life after bankruptcy. It is not the end. Never lose sight of your goals and dreams, and don’t let this circumstance beat you. And remember, MOST bankruptcies can (and SHOULD) be avoided. Doing so may require great work and sacrifice, and even admitting that you need help.

Like everything in life, don’t get distracted by the quick fix solution others provide, but be willing to put in the effort to get yourself out of the mess you got yourself into. It’s possible and worth it!