How Do You File Bankruptcy?
From its terminology to its portrayal in popular culture, bankruptcy presents a confusing picture of how its processes work and how filers go about actually getting protection for their assets. You hear the term, “Declare bankruptcy,” but where do you declare it, and how do you declare it? Then, you have the classic scene from The Office where the regional manager, Michael Scott, “declares” bankruptcy by walking into the office area and loudly stating for all to hear, “I declare bankruptcy.” Michael may represent the misunderstandings American consumers have, but his ignorance of how bankruptcy works are real.
You initiate a bankruptcy by submitting a petition to a US Bankruptcy court. You will not typically need to appear before the judge, but you must usually attend the meeting of the creditors. Depending on the Chapter filed, bankruptcy can take between 2 months and 4 or 5 years.
In our years of experience counseling and educating bankruptcy filers, we know that the process of filing bankruptcy can cause emotional stress during an already financially difficult time. Understanding the process ahead of time can relieve some of the stress originating from the fear of not knowing how it all works.
Bankruptcy exists for a reason. Many well-known businessmen and women filed for bankruptcy protection along their path to financial success. Many scholars and journalists have argued that the flexibility and generosity of the bankruptcy laws in the US have fueled the entrepreneurial spirit, allowing many start-up-minded individuals to take risks that would feel prohibitive in other countries with more strict bankruptcy laws.
An Action in Federal Court
To file bankruptcy, you must submit a bankruptcy petition with a US bankruptcy court, which makes up part of the US Department of Justice. Every state has at least one bankruptcy court district.
Twenty-seven states have just one district, although they have multiple court locations around the state for geographic and practical convenience. Twelve states have two district courts (either eastern and western or northern and southern). Nine states have three district courts, including Alabama, Florida, Georgia, Illinois, Louisiana, North Carolina, Oklahoma, and Pennsylvania. Finally, California, New York, and Texas have four bankruptcy districts. In all, there are 90 bankruptcy district courts in the 50 states and DC.
A chief judge oversees the entire district court, with a chief bankruptcy judge heading each bankruptcy district court. Your case gets assigned to a specific bankruptcy judge, although, if you file a Chapter 7 bankruptcy petition, you may never appear before the judge.
Chapter 7 filings are far more common than the next most common filing, Chapter 13. Nationwide, Chapter 7 filings often make up 85% of all bankruptcy filings. Regardless of the bankruptcy chapter under which you file, you have at least one meeting that you must attend, known as the 341 meetings. This meeting allows your creditors included in your bankruptcy petition to ask you, the debtor, questions about your finances and debts. While sometimes uncomfortable for the debtors if one or more creditor chooses to delve into difficult or complicated consumer decisions, many debtors report that their creditors didn’t ask any questions at all. Often, creditor representatives do not even attend the 341 meetings.
Petition and Forms
The paperwork filed with the bankruptcy court starts with the form known as Official Form 101, or Form Number B 101, “Voluntary Petition for Individuals Filing for Bankruptcy.” You can find a pdf version of this form here. It includes the following sections:
-
Identify Yourself
-
Tell the Court About Your Bankruptcy Case
-
Report About Any Businesses You Own as a Sole Proprietor
-
Report if You Own or Have Any Hazardous Property or Any Property That Needs Immediate Attention
-
Explain Your Efforts to Receive a Briefing About Credit Counseling
-
Answer These Questions for Reporting Purposes
-
Sign Below
This nine-page form is the first of many forms you will need to complete. Depending on the bankruptcy chapter you are filing, you will need to complete a myriad of other statements, summaries, schedules, notices, orders, reaffirmations, and declarations.
Declarations
Among the many declarations, you must file with the court are schedules that will indicate the types and values of any real estate properties you own, and the types and value of any personal property (from vehicles and clothing to furniture and personal valuables) that you plan to exempt from bankruptcy, your employment status and detailed paycheck information (income and deductions), and details of your household bills and financial obligations.
If you work with an attorney, your attorney may have her or his own separate forms for the filer to fill out. We have seen attorney forms that request a detailed inventory of household items that include the number of forks in the household the number of articles of clothing, even how many pairs of socks, and how many pieces of underwear you have.
Attorney or Pro Se
Speaking of attorneys, many potential bankruptcy filers ask if an attorney is necessary during the process. One bankruptcy attorney, when asked this question, responded, “No, you do not need a bankruptcy attorney to file bankruptcy. Then again, you don’t need a surgeon to remove your own appendix. You can do both yourself.” The obvious insinuation was that filing for bankruptcy on your own would lead to a lot of pain and severe long-term consequences.
Based on our surveys, approximately one out of every five bankruptcy filers completes the process without an attorney. This is known as filing “pro se,” or “for yourself.” We always recommend potential filers seek professional legal counsel, even if they feel their finances don’t involve the complexities that require an experienced bankruptcy attorney.
Most filers who do so on their own cite the cost of attorney services as prohibitive for working with legal counsel. Many attorneys work out a payment plan with their clients ahead of their bankruptcy filing, sometimes diverting creditor payments to legal costs. Filers hoping to find attorneys willing to “finance” their filing typically bump up against the reality of the attorney’s dilemma. If the attorney finances his or her fees, they then become a creditor to the filers, subject to the same possibilities of having their fees discharged in bankruptcy court.
Fees
Attorney fees vary and sometimes by the complexity of the potential bankruptcy case. Sometimes attorneys in large metropolitan areas charge two to three times what they charge in smaller towns and cities.
We regularly see attorney fees equal to 35% to almost 80% of the national median household monthly net income. In 2020, with the gross annual household median income around $65,000 and net median monthly income around $4,300, an attorney fee of $2,500 equals 58% of the median net monthly income.
All bankruptcy courts also charge various filing fees based on the chapter you file and the extra assistance or service you request. Typically, filing fees in 2020 for Chapter 7 cases totaled more than $300, not including miscellaneous fees.
You can file for financial hardship to request the court waive all filing fees, which seems ironic given that bankruptcy by nature defines financial hardship. Most courts provide such waivers when the filer’s income is 150% or less of the established poverty levels.
Publication of Filer Names
Many filers still fear the shame of seeing their name published in local newspapers. Traditionally, local newspapers ran a weekly or monthly column that would include the names and bankruptcy chapters of all those who had filed a bankruptcy petition in the previous week or month. These columns were often buried in the middle of the back of the business section.
In the late 2000s, along with all the other changes to the newspaper industry, most business reporters started to pull their bankruptcy columns from publication. While a few still include bankruptcies each month, most bankruptcy filers will no longer see their names and cities of residence in print or published online.
Still, anyone willing to sign up for a PACER account (Public Access to Court Electronic Records) and pay a dime or two per screen or document page can find get access to any piece of paper or document you file with your petition, from your income and debts to your household expenses and assets.
While such access can make most filers feel very vulnerable to public scrutiny, the reality is that very few members of the general public care to look up who is filing for what chapter anymore.
Related Questions
Do you get out of all debts if you file for bankruptcy?
Filing bankruptcy does not discharge you of the responsibility to repay all debts. Familial obligations like child support and alimony nearly always survive bankruptcy filings, as do most student loans, many back taxes, and criminal penalties resulting from willful and malicious injury to others.
How much debt do you have to have to file for bankruptcy?
The US Bankruptcy Code does not specify a minimum amount of debt you need to have in order to file a bankruptcy petition. However, bankruptcy filers should weigh the extremely negative effects on their credit and future finances against the benefits of discharging debts of any size in bankruptcy.
Filing Bankruptcy in America: Four-Part Series
Money Fit by DRS Inc. is publishing a four-part series to explain the bankruptcy process in great detail. We intend to create a guide for individuals looking to understand the bankruptcy process so they can make informed decisions on whether this is an alternative to dealing with their debt that they should explore further.
Read About Bankruptcy In America
Related Content:
What to do if you can afford to file for bankruptcy
