Steps to Initiate the Bankruptcy Process

Quick answer

• Understand your options: Chapter 7 (liquidation) or Chapter 13 (reorganization).
• Gather all financial documents: debts, income, assets, and expenses.
• Take a mandatory credit counseling course from an approved agency.
• Determine if you qualify for Chapter 7 using the means test.
• If you qualify and choose Chapter 7, prepare to list all assets and debts.
• If you choose Chapter 13, create a repayment plan for your debts.
• Hire an experienced bankruptcy attorney or prepare for pro se filing.

Who this is for

• Individuals overwhelmed by overwhelming debt with no clear path to repayment.
• People facing aggressive collection actions like wage garnishment or foreclosure.
• Those seeking a legal fresh start to rebuild their financial future.

What to check first (before you act)

Goal and timeline

What do you hope to achieve by filing for bankruptcy? Is it to discharge unsecured debts, save your home from foreclosure, or stop wage garnishment? Your specific goal will influence the type of bankruptcy you should consider and the urgency of your timeline. Some bankruptcies can be processed relatively quickly, while others, like Chapter 13, involve a multi-year repayment plan.

Current cash flow

Analyze your income and expenses meticulously. Understanding how much money comes in and how much goes out each month is crucial. This will help you determine if you can afford to repay some of your debts (Chapter 13) or if you qualify for debt discharge under Chapter 7. Track every dollar for at least a month or two to get an accurate picture.

Emergency fund or safety buffer

Do you have any savings set aside for unexpected events? While bankruptcy can address overwhelming debt, it’s important to have some liquid assets to cover immediate needs during and after the process. The amount needed can vary, but having a small buffer can prevent you from falling into new debt immediately.

Debt and interest rates

List all your debts, including credit cards, medical bills, personal loans, mortgages, and car loans. Note the creditor, the amount owed, and the interest rate for each. High-interest debts are often a primary driver for considering bankruptcy. Understanding these details will help you and your legal counsel assess which debts are dischargeable and which might need to be repaid.

Credit impact

Filing for bankruptcy will significantly impact your credit score and credit report. While it can be a necessary step to recover from severe financial distress, be prepared for this consequence. The impact typically lasts for several years, but rebuilding credit is possible over time.

Step-by-step (how to start bankruptcy)

Step 1: Assess your financial situation

What to do: Gather all financial documents, including bank statements, pay stubs, tax returns, credit card statements, loan documents, and property deeds. Create a detailed list of all your debts, including the creditor, balance, and interest rate.
What “good” looks like: A comprehensive understanding of your income, expenses, assets, and liabilities. You should be able to clearly see the extent of your financial distress.
Common mistake and how to avoid it: Missing or inaccurate documentation. Avoid this by being thorough and organized from the start; it’s better to have too much information than not enough.

Step 2: Understand bankruptcy chapters

What to do: Research the primary types of personal bankruptcy: Chapter 7 (liquidation) and Chapter 13 (reorganization). Understand the basic requirements and outcomes of each.
What “good” looks like: You know which chapter aligns best with your financial goals and circumstances.
Common mistake and how to avoid it: Assuming all bankruptcies are the same. Avoid this by learning the distinct purposes and processes of each chapter.

Step 3: Take a credit counseling course

What to do: Complete a mandatory, non-profit credit counseling course from an agency approved by the U.S. Trustee Program. You’ll receive a certificate of completion.
What “good” looks like: You have a valid certificate of completion, which is required to file for bankruptcy.
Common mistake and how to avoid it: Taking a course from an unapproved provider. Avoid this by checking the U.S. Trustee Program website for a list of approved agencies in your district.

Step 4: Determine Chapter 7 eligibility (Means Test)

What to do: If you’re considering Chapter 7, you must pass the “means test.” This compares your income to the median income in your state and assesses your ability to repay debts.
What “good” looks like: You understand whether your income level makes you eligible for Chapter 7.
Common mistake and how to avoid it: Not understanding how the means test works or incorrectly calculating your eligibility. Avoid this by consulting with an attorney or using reliable online calculators designed for this purpose.

Step 5: Decide on Chapter 7 or Chapter 13

What to do: Based on your financial assessment, goals, and means test results, choose between Chapter 7 or Chapter 13.
What “good” looks like: A clear decision supported by your financial reality and legal advice.
Common mistake and how to avoid it: Choosing the wrong chapter, which can lead to denial of discharge or an unmanageable repayment plan. Avoid this by seeking professional advice.

Step 6: Hire a bankruptcy attorney (Recommended)

What to do: Find an experienced bankruptcy attorney in your area. Many offer free initial consultations.
What “good” looks like: You’ve retained legal counsel who understands bankruptcy law and can guide you through the process.
Common mistake and how to avoid it: Trying to navigate the complex bankruptcy system alone (“pro se”). Avoid this by recognizing the significant legal complexities and potential pitfalls, and hiring an expert.

Step 7: Prepare the bankruptcy petition and schedules

What to do: Work with your attorney (or yourself, if filing pro se) to complete the official bankruptcy forms, known as the petition and schedules. These detail all your financial information.
What “good” looks like: All forms are accurately and completely filled out, listing all assets, debts, income, and expenses.
Common mistake and how to avoid it: Omitting information or providing inaccurate details. This can lead to dismissal of your case or denial of discharge. Avoid this by being scrupulously honest and thorough.

Step 8: File the bankruptcy petition

What to do: Submit the completed petition and schedules to the bankruptcy court in your district.
What “good” looks like: Your case is officially opened, and an automatic stay goes into effect, halting most collection actions.
Common mistake and how to avoid it: Filing incomplete or incorrect paperwork. This can delay your case or lead to its dismissal. Ensure all required documents are included.

Step 9: Attend the meeting of creditors (341 Meeting)

What to do: Appear before the bankruptcy trustee to answer questions under oath about your petition and financial situation.
What “good” looks like: You are prepared, answer questions truthfully, and the trustee is satisfied.
Common mistake and how to avoid it: Failing to attend or not being prepared to answer questions. This can result in dismissal. Avoid this by reviewing your petition thoroughly and understanding common questions.

Step 10: Complete debtor education course

What to do: Take a second mandatory course, a debtor education course, which focuses on personal financial management.
What “good” looks like: You have a certificate of completion for the debtor education course.
Common mistake and how to avoid it: Failing to complete this course before your discharge is granted. Avoid this by scheduling and completing it promptly after filing.

Step 11: Receive your discharge (Chapter 7) or complete repayment plan (Chapter 13)

What to do: For Chapter 7, the court will issue a discharge order, releasing you from most of your debts. For Chapter 13, you must successfully complete all payments under your confirmed repayment plan.
What “good” looks like: Your debts are legally discharged (Chapter 7) or you’ve successfully fulfilled your payment obligations (Chapter 13), allowing you to move forward.
Common mistake and how to avoid it: Not understanding what debts are discharged or failing to make payments in Chapter 13. Avoid this by carefully reviewing your discharge order and adhering strictly to your Chapter 13 plan.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Not understanding debt types	Filing for bankruptcy and expecting to discharge non-dischargeable debts.	Research which debts are typically dischargeable (e.g., credit cards, medical bills) and which are not (e.g., most student loans, recent taxes, child support). Consult an attorney.
Omitting assets or debts	Reopening the case, losing discharge, or facing legal penalties.	Be absolutely thorough and honest when listing all assets and debts. If unsure, disclose it and ask your attorney.
Incorrectly completing the means test	Being denied Chapter 7 eligibility or being forced into Chapter 13.	Use an attorney’s assistance or a reliable online calculator. Double-check all income and expense figures.
Missing the credit counseling deadline	Inability to file the bankruptcy petition.	Complete the course as soon as you decide to file and keep the certificate readily available.
Not attending the 341 Meeting	Automatic dismissal of your bankruptcy case.	Mark the date on your calendar, set reminders, and arrange transportation. If an emergency prevents attendance, contact the trustee immediately.
Failing to complete debtor education	Your debts will not be discharged.	Schedule and complete the course promptly after filing. Ensure you receive and retain the certificate.
Misunderstanding exemptions	Losing non-exempt assets that could have been protected.	Understand your state’s or federal exemptions and how they apply to your assets. An attorney is invaluable here.
Lying on bankruptcy forms	Dismissal of the case, denial of discharge, fines, or even criminal charges.	Be completely truthful and transparent in all filings and statements. Honesty is paramount.
Not consulting an attorney	Numerous errors, missed deadlines, incorrect filings, and unfavorable outcomes.	While pro se filing is possible, the complexity of bankruptcy law makes legal representation highly advisable to ensure the best possible outcome and avoid costly mistakes.
Assuming all debts are discharged	Unexpected collection attempts for debts that weren’t discharged.	Carefully review your discharge order to confirm which debts were included. Understand that certain debts are non-dischargeable by law.

Decision rules (how to start bankruptcy)

• If you have significant unsecured debt (credit cards, medical bills) and limited assets, then Chapter 7 may be your best option because it aims to discharge these debts quickly.
• If you have regular income and want to keep secured property (like a home or car) that you are behind on payments for, then Chapter 13 may be better because it allows for a structured repayment plan.
• If your income is above your state’s median income for your household size, then you will likely need to pass the means test to qualify for Chapter 7; if you don’t, Chapter 13 is usually the alternative.
• If you have a history of recent bankruptcy filings, then you may be ineligible for a discharge in a new bankruptcy case.
• If you owe significant amounts of taxes, then you need to determine if they are dischargeable, as most recent taxes are not; older taxes might be dischargeable under certain conditions.
• If you have substantial non-exempt assets, then Chapter 7 might result in those assets being sold, making Chapter 13 a better choice if you wish to keep them.
• If you are facing foreclosure or repossession, then filing for bankruptcy, especially Chapter 13, can provide an automatic stay to temporarily halt these actions, giving you time to catch up on payments.
• If you are considering bankruptcy, then you must complete a credit counseling course before filing; failure to do so will result in your case being dismissed.
• If you have valuable assets you wish to keep, then ensure they are covered by applicable state or federal exemptions, or consider Chapter 13.
• If you are unsure about your eligibility or the best course of action, then consult with an experienced bankruptcy attorney, as they can analyze your specific situation.
• If you have student loan debt, then understand that most student loans are not dischargeable in bankruptcy, though there are very limited exceptions.
• If you want to stop aggressive debt collection, then filing for bankruptcy immediately triggers an automatic stay, which is a court order that halts most collection activities.

FAQ

What is the first step in starting bankruptcy?

The very first step is to assess your complete financial situation and understand your goals. This involves gathering all financial documents and getting a clear picture of your income, expenses, assets, and debts.

Do I need a lawyer to file for bankruptcy?

While you can file without an attorney (pro se), it is highly recommended to hire one. Bankruptcy law is complex, and an attorney can help you navigate the process, ensure you meet all requirements, and protect your rights, significantly increasing your chances of a successful outcome.

How long does the bankruptcy process take?

Chapter 7 bankruptcy is typically resolved within 4 to 6 months from filing. Chapter 13 bankruptcy involves a repayment plan that lasts 3 to 5 years.

What is the automatic stay?

The automatic stay is a legal injunction that goes into effect immediately upon filing for bankruptcy. It prohibits most creditors from continuing collection efforts, such as lawsuits, wage garnishments, and foreclosures, giving you breathing room.

Can I keep my property if I file for bankruptcy?

It depends on the type of property, its value, and applicable exemptions. In Chapter 7, non-exempt assets may be sold to pay creditors. In Chapter 13, you can often keep property by including its value in your repayment plan.

What is the difference between Chapter 7 and Chapter 13?

Chapter 7 involves liquidating non-exempt assets to pay creditors, aiming for a quick discharge of debts. Chapter 13 involves creating a repayment plan over 3 to 5 years to repay some or all of your debts, allowing you to keep secured property.

Will bankruptcy solve all my debt problems?

Bankruptcy can discharge most unsecured debts like credit card bills and medical expenses. However, certain debts, such as most student loans, recent taxes, child support, and alimony, are typically not dischargeable.

What happens to my credit score after bankruptcy?

Bankruptcy significantly impacts your credit score and will remain on your credit report for up to 10 years. However, it provides a legal fresh start, and with responsible financial management, you can begin rebuilding your credit.

What this page does NOT cover (and where to go next)

• Specific legal advice for your unique situation. Consult with a qualified bankruptcy attorney.
• Detailed analysis of state-specific exemption laws. Research your state’s exemption statutes or ask an attorney.
• The process of filing for business bankruptcy. Seek specialized business legal counsel.
• Strategies for debt negotiation or settlement outside of bankruptcy. Explore options with a credit counselor or debt relief specialist.
• The emotional and psychological impact of severe debt and bankruptcy. Consider speaking with a financial therapist or counselor.