Bankruptcy is a legal process that can provide financial relief to a person or business that is unable to pay their outstanding debts.
It is not a “simple” legal process. It is complicated, and involves determining what kind of debt you have, whether you can actually pay all or some of it, deadlines, documents to fill out and court appearances.
If you want to file bankruptcy yourself – known as DIY (Do It Yourself) bankruptcy – you can avoid paying an attorney. Depending on how complicated your finances are and how much work you’re willing to do, it’s possible you will succeed.
The two major forms of bankruptcy for consumers are Chapter 7 and Chapter 13. Individuals also could file Chapter 11, but it is exceedingly rare that you would go that route on your own. Chapter 11 an awfully expensive, very complicated choice that could take years to complete.
Chapter 7, the most common, liquidates some of the individual’s assets to help pay off unsecured debt like credit cards and medical bills. However, the American Bankruptcy Institute says that 90% of Chapter 7 cases are deemed “no asset cases” by bankruptcy trustees, meaning there aren’t assets worth liquidating so the individual loses almost nothing in the proceeding.
Chapter 13 allows the person filing to keep more of their assets. The individual creates a 3–5-year repayment plan for debt, which must be approved by the court. If approved, and the payment plan is completed, the court will discharge remaining unsecured debt.
If you’re struggling with debt, paying an attorney to handle your bankruptcy may be another bill you don’t want to take on.
Those who undertake a DIY bankruptcy must make sure they understand the laws and regulations and follow all the steps, or it’s likely their bankruptcy petition will not be accepted by the court. According to the American Bankruptcy Institute, fewer than half of those filing Chapter 7 bankruptcy without assistance are successful, while 93.9% of those who hire an attorney are. Less than two out of every 100 of those who file Chapter 13 without an attorney are successful.
Filing for bankruptcy shouldn’t be taken lightly – it has financial consequences that will have a negative long-term impact on your ability to get credit, loans, and even get an apartment or job. If you are having trouble paying down debt, before filing for bankruptcy you should consider less drastic alternatives, such as debt consolidation or debt settlement.
Federal law requires that everyone who files for bankruptcy take a credit counseling course, which may help you determine if another debt-relief option is better for your situation.
When to Consider DIY Bankruptcy
Bankruptcy attorneys charge $200-$300 an hour, and it can cost anywhere from $1,000 to $6,000 for one to handle your case, depending on the type of bankruptcy and how complicated it is. Most experts, as well as the U.S. Bankruptcy Court, will tell you that it’s worth the money. Still, if your income is low and you don’t own a lot of property, filing bankruptcy yourself may be worth it.
It could make sense to file bankruptcy without using a lawyer if:
- You are filing Chapter 7
- Your yearly household income is less than the state median
- You don’t own much property
- Most of your debt is unsecured
- None of your creditors are charging you with fraud
You will want to hire an attorney if:
- You are filing Chapter 13
- Your yearly household income is more than the state median
- You own a house, vacation property, luxury items like boats or sportscars, etc.
- A creditor is accusing you of fraud
- You have debt that can’t be discharged through bankruptcy
Why are Bankruptcy Attorneys Recommended?
Bankruptcy law is complicated and specific. A bankruptcy filing has many steps, strict deadlines and requires lots of documentation, including dozens of forms to fill out. The court expects individuals who file bankruptcy to be familiar with U.S. Bankruptcy Code, federal rules and any local rules that apply – you don’t get a pass simply because you are handling it yourself.
There are also long-term financial consequences to bankruptcy that make it vital that your case is handled in your best interests.
The federal judiciary’s U.S. Courts website warns, “Filing personal bankruptcy under Chapter 7 or Chapter 13 takes careful preparation and understanding of legal issues.” It stresses that misunderstanding the law or making mistakes may affect your case. Court employees and bankruptcy judges are prohibited by law from offering legal advice.
If you don’t handle your case well, it may not go forward, and you’ll be back at square one. It can also end up costing you more money than it would have to hire an attorney in the first place.
“Bankruptcy is a complicated matter,” said Lyle Solomon, principal of California’s Oak View Law Group, who has been handling bankruptcy cases for 20 years. “There is a lot of paperwork, things need to be filed in a timely and complete manner. I have had people come to me several months later after trying to do it themselves. Had they come to me right away, I could have saved them time and money.”
A bankruptcy attorney will go over bankruptcy law and help you understand what’s involved, and assist you with your case, including:
- Advising you on whether you should file bankruptcy
- Helping you determine if you should file Chapter 7 or 13
- Reviewing which debts can be discharged
- Making sure all the forms are filled out correctly and filed on time
- Helping protect assets like your home, car, or other property
- Discussing tax consequences
- Giving you advice on whether to continue to pay creditors, and dealing with creditors that may still be contacting you
- You can file bankruptcy online – while some states, like California, have established an electronic self-representation system, which allows individuals to file online, most states still require an attorney to do this.
Consider Hiring a Non-Attorney Petition Preparer
Individuals who file for bankruptcy without the help of an attorney may use a non-attorney petition preparer to help with paperwork. The preparers can’t give legal advice, answer questions about legalities or represent the filer in court. In fact, they are sometimes referred to by the court as a “typing service,” in order to make it clear that their job is to simply fill out forms at your direction.
Petition preparers charge a fee, which is regulated by the state. It can be anywhere from $100 to several hundred. They will sign the documents they prepare, including printing their name, address and Social Security number on the documents, and provide you with copies. You also have to sign them as the person who is filing bankruptcy.
Because petition preparers are not required to have any special training or bankruptcy knowledge, there are some who may try to take advantage of people who are attempting to navigate the bankruptcy process on their own. Federal law has provisions for bringing suit against a fraudulent petition preparer, but in the short-term hiring the wrong person can also mean that your case is dismissed or that you lose money.
How to File Chapter 7 Yourself
Chapter 7 is an easier DIY bankruptcy than Chapter 13, because it is simpler. It’s the most common form of consumer bankruptcy – in 2021, 256,940 bankruptcies filed in the U.S. were Chapter 7, while 124,795 were Chapter 13. While bankruptcy court “liquifies” your assets to pay your creditors, exemptions usually allow you to keep your car and other necessities.
To be eligible for Chapter 7 bankruptcy, you must pass the “means test” – your income must be below your state’s median as determined by the U.S. Department of Housing and Urban Development.
Before you file, you need to gather:
- Last two years of income tax returns
- Most recent six months of proof of income (pay stubs, if you are employed)
- Most recent three months of bank account statements
The steps and costs for filing Chapter 7 bankruptcy are:
- Collecting documents: The documents listed above, accurately showing your income and expenses, are a major factor to a successful filing.
- Credit counseling: Federal law requires those planning to file bankruptcy to take a pre-bankruptcy credit counseling course from a U.S. Trustee-approved agency 180 days or less before filing. The course will cost up to $50.
- Required forms: There are 23 federal bankruptcy forms to fill out in order to file bankruptcy, and your state may have some as well. In Form 101, the voluntary petition, you explain why you’re filing, what you’ve done to improve your finances and more. Other forms require you to list your assets, divide them into exempt and nonexempt, separate your secured and unsecured debt, list contracts and leases, assess your income and more. Once they are filled out and approved by the court, you can file for bankruptcy.
- Filing: When you file with the bankruptcy court, you must pay a fee — $338 for Chapter 7. There are other fees if you need to file amendments, complaints, refile etc.
- 341 hearing: You will be assigned a bankruptcy trustee, who will meet with you in a hearing that’s officially called a 341 hearing, but also known as the “meeting of creditors.” The trustee goes over your paperwork and determines how much your creditors will be paid. Creditors have 60 days to object to the debt discharge. You also have 45 days to determine what will happen to your secured debt, like car payments or mortgage.
- Reaffirm loans: You may want to reaffirm some of your debt, for instance, your car loan. This involves a separate court hearing that you must attend and represent yourself if you are pro se. If you have an attorney, they can represent you.
- Debtor education class: You are required to take a second financial education class that will help you stay out of debt and rebuild your finances.
- Debts are discharged: Your unsecured debt will be discharged once the deadlines have passed, the documents have all been filed and you have a certificate showing you took the second class. Your official order will come in the mail. You can also check the status of your case through the Voice Case Information System, 1-866-222-8029.
Filing Chapter 13 Yourself
It costs a little less to file Chapter 13 – $313 – but the process is more complicated.
People who file Chapter 13 have enough income to pay some of their debt, according to the court. Those who hoped to file Chapter 7 but didn’t pass the means test often then file for Chapter 13.
The biggest difference between Chapter 7 and 13 is that debt isn’t discharged immediately. Instead, the court approves a debt payment plan that takes 3-5 years. If you stick to the plan, the unsecured debt left over at the end is discharged.
The trustee assigned to you collects money from you according to the plan, then pays your creditors.
Nearly half of those who file Chapter 13 don’t make it to the finish line, largely because they haven’t been able to keep up with payments. Of the cases completed or dismissed in 2021, 58% completed their plan, with 42% failing to do so. If your case is dismissed, you are back to where you were before you filed.
It’s possible to go back to court and have the payment agreement modified to help, and about a quarter of those who were successful did that.
Because Chapter 13 is more complicated, most experts recommend hiring a bankruptcy attorney to help with the process.
Non dischargeable Priority Debt
Some unsecured debt can’t be discharged through a bankruptcy. You are still required to pay “priority debt.” Priority debtors are paid first in a Chapter 7 bankruptcy, with “nonpriority” debt, like credit card balances, taking a back seat. The trustee will pay as much as possible toward these debts. What’s left will go toward nonpriority balances, with what can’t be paid discharged.
In a Chapter 13 bankruptcy, you will be required to pay the balance of the priority debt through your payment plan.
Some of the most common priority debt is:
- Child support and alimony
- Legal fines, penalties, and restitution related to a driving while intoxicated judgment
- Most taxes
- Retirement plan loans
What to do After Filing for Bankruptcy
Bankruptcy is considered a fresh start. If you want to ensure that you take the best possible advantage of the new beginning after filing for bankruptcy, make sure you don’t get into financial trouble again.
A top priority will be to rebuild your credit. While bankruptcy stays on your credit report for 7-10 years, you still have the power to improve your credit. Making on-time payments and not maxing out credit cards are key to a stronger credit score.
Credit counseling through a nonprofit credit counseling agency is a good step toward a more solid financial future. Nonprofit credit counselors are required by law to give you advice that’s in your best interest and will review your budget and financial options going forward.
You don’t have to wait until you file for bankruptcy to take advantage of credit counseling. Even if you are just considering bankruptcy, or looking for a way to pay down debt, talking to a nonprofit credit counselor can help with your financial planning and reviewing all the viable options.
About The Author
Maureen Milliken has been writing about finance, banking, investment, entrepreneurship, real estate and other related topics for more than 30 years. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and currently is one of the hosts of the Mainebiz business-focused podcast, “The Day that Changed Everything” in addition to her daily writing. She also is is the author of three mystery novels and two nonfiction books.
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