Should You File for Bankruptcy? What an Attorney Can Do

What Bankruptcy Actually Does

Bankruptcy is a federal legal process that allows individuals and businesses to reorganize or eliminate debts they can't repay. When you file, an automatic stay immediately stops most collection actions: wage garnishments, lawsuits, creditor calls, foreclosure proceedings (temporarily), and most repossession attempts. The relief is immediate.

What happens next depends on which chapter of bankruptcy you file. For individuals, the two main options are Chapter 7 (liquidation) and Chapter 13 (repayment plan).

Chapter 7 Bankruptcy: Fresh Start

Chapter 7 is the fastest and most common form of personal bankruptcy. Most qualifying debts are discharged — legally eliminated — typically within 3–6 months of filing. You emerge with a clean slate.

What Gets Discharged

• Credit card debt
• Medical bills
• Personal loan debt
• Utility bills
• Older tax debts (with specific conditions)
• Lease and contract obligations (with some exceptions)

What Is NOT Discharged in Chapter 7

• Child support and alimony
• Most student loan debt (except in rare cases of undue hardship)
• Recent tax debts (generally last 3 years)
• Debts from fraud or intentional wrongdoing
• Criminal fines and restitution
• Debts incurred by drunk driving

The Means Test

Not everyone qualifies for Chapter 7. The means test compares your income to your state's median income. If your income is below the median, you generally qualify automatically. If it's above, a more detailed test examines your disposable income after allowed expenses. If you have sufficient disposable income, you may be redirected to Chapter 13 instead.

What Happens to Your Property

A bankruptcy trustee can liquidate non-exempt assets to pay creditors. But most Chapter 7 filers lose nothing — because federal and state exemptions protect most ordinary property: your home equity up to a limit, your vehicle up to a limit, retirement accounts, household furnishings, and tools of your trade. A bankruptcy attorney's crucial role is identifying and maximizing your exemptions before you file.

Chapter 13 Bankruptcy: The Repayment Plan

Chapter 13 allows you to keep assets that would be liquidated in Chapter 7 while repaying some or all of your debts over a 3–5 year plan. It's often called the "wage earner's plan."

Why Choose Chapter 13 Over Chapter 7?

• You're behind on your mortgage and want to save your home from foreclosure — Chapter 13 lets you catch up on arrears through the repayment plan while keeping current payments
• You have too much income to qualify for Chapter 7 under the means test
• You have non-exempt assets you want to protect that would be liquidated in Chapter 7
• You co-signed a debt with someone — Chapter 13 can protect the co-signer from collection during the plan
• You have certain tax debts that can be paid off through the plan with interest and penalties reduced

How Chapter 13 Works

You propose a repayment plan to the court, administered by a trustee. You make monthly payments to the trustee, who distributes funds to creditors in priority order. After completing the 3–5 year plan, remaining qualifying debts are discharged. The amount you pay depends on your disposable income and the value of your non-exempt assets.

What Bankruptcy Costs

Filing Fees

• Chapter 7: $338 court filing fee
• Chapter 13: $313 court filing fee

Attorney Fees

• Chapter 7 attorney fees: Typically $1,000–$3,500 depending on complexity and location
• Chapter 13 attorney fees: Typically $2,500–$6,000 — often paid in part through the repayment plan

While you can technically file bankruptcy without an attorney ("pro se"), it's strongly inadvisable. The process is technical, mistakes can cost you exemptions or result in dismissal, and the complexity of bankruptcy code makes errors easy and costly. A bankruptcy attorney's fee is usually far less than the value they protect and the mistakes they prevent.

Alternatives to Bankruptcy

Before filing, consider these alternatives — some may achieve similar results with less damage to your credit:

• Debt negotiation/settlement: Creditors sometimes accept lump-sum settlements for less than the full balance. Works best when accounts are already delinquent and you have some cash available.
• Nonprofit credit counseling: NFCC-affiliated nonprofit agencies can negotiate lower interest rates and set up debt management plans (DMPs) that consolidate payments. No debt reduction, but reduced interest.
• Debt consolidation loan: If you have good enough credit, consolidating high-interest debt at a lower rate can make repayment manageable without bankruptcy.
• "Judgment proof" status: If you have no income above exemptions, no property to seize, and no assets worth pursuing — you may be effectively uncollectable. Creditors can't get blood from a stone. An attorney can advise if this applies to you.

The Credit Impact of Bankruptcy

Bankruptcy has significant credit consequences, but these are often overstated:

• Chapter 7 remains on your credit report for 10 years from filing
• Chapter 13 remains for 7 years from filing
• Credit scores drop sharply at filing but begin rebuilding immediately if you handle post-bankruptcy credit responsibly
• Many filers see credit scores in the 600s within 2 years of discharge by managing a secured credit card and keeping all payments current

Important perspective: if your credit is already severely damaged by months of missed payments, bankruptcy may actually improve your credit position long-term by eliminating the ongoing negative reporting of unpaid debts.

What a Bankruptcy Attorney Does for You

• Determines whether Chapter 7 or Chapter 13 is right for your situation
• Conducts means test analysis for Chapter 7 eligibility
• Identifies every applicable exemption to protect your property
• Prepares and files all required paperwork accurately
• Represents you at the meeting of creditors (341 meeting)
• Handles creditor objections and adversary proceedings
• Advises on timing (important for recent large purchases, tax refunds, and transfers)
• Explains reaffirmation agreements for secured debts you want to keep (like a car loan)