By Erica Bradley
I always considered myself financially responsible.
When I graduated from college in 2007 with a bachelor’s degree in English and mass communication, I had completed three internships and had a decent savings account, so I considered myself well prepared for the job market. However, with the economy hitting rock bottom in 2008, finding a full-time job was difficult. For almost two years, I worked with a temp agency but struggled to find a permanent position. I racked up credit card and medical debt just trying to cover my basic expenses.
- Consult a bankruptcy attorney to complete a “means test”
- Decide whether to file Chapter 7 or Chapter 13 bankruptcy
- Complete bankruptcy paperwork and pre-filing counseling
- File case and set court date
- Complete post-filing counseling
- Court discharges eligible debts (excluding student loans, alimony, etc.)
- Pay attorney and court fees
American Bankruptcy Institute
National Association of Consumer Bankruptcy Attorneys (NACBA)
Late fees and interest soon caused my debts to spiral out of control. I contacted my student loan providers to request a forbearance—which meant that I did not have to make my monthly payments for awhile—but my loans were still accruing interest.
I had to stop making my car payment, but the lender was willing to work with me while I was looking for a job. Meanwhile, I struggled to keep up with rent in Boston—one of America’s most expensive cities. My credit score plummeted. It had become clear that I would need to declare bankruptcy in order to recover my finances.
How Do You File for Bankruptcy?
The first step in filing for bankruptcy is to discuss your options and goals with an attorney. The American Bankruptcy Institute has a list of bankruptcy attorneys sorted by state. Not all bankruptcy lawyers charge the same fees, so it is a good idea to shop around. Although the court costs and administrative fees to file bankruptcy are relatively low, the lawyer fees can get quite expensive. (All together, my bankruptcy cost me around $1,500.)
The attorney guides you through what is called a “means test,” which examines your income, assets, debts, and expenses. In some cases, debt settlement—working with creditors to pay off debts without declaring bankruptcy—is a better option.
If bankruptcy is deemed the best approach, then the means test helps determine whether to file Chapter 7 or Chapter 13:
- In Chapter 7 bankruptcy, your property can be seized and sold by the bankruptcy trustee to pay your debts.
- In Chapter 13 bankruptcy, you are allowed to keep more of your assets, but you must commit to a three- to five-year plan to repay your creditors. For example, if you are concerned about losing a $5,000 diamond ring in Chapter 7, you could pay $5,000 into your repayment plan for Chapter 13 and keep the ring, says Robertson B. Cohen, managing partner at Denver, Colo.-based Cohen and Cohen, P.C.
Some debts—such as student loans, alimony, child support, taxes, and restitution as the result of a criminal sentence—cannot be discharged in a bankruptcy. Some assets, such as retirement accounts and 401(k) plans, also are off-limits and cannot be used to pay off debts in most cases.
When deciding to file for bankruptcy, timing also is a concern, says Cohen. Some cases must be expedited due to impending eviction or foreclosure. In other cases, filing should be delayed, particularly if you recently have made any “preferred payments” to creditors or relatives. For example, if you recently repaid a personal loan to your grandmother, the bankruptcy trustee could require your grandmother to surrender that payment to the court in order to pay off other debts.
Once You Decide to File
Anyone who files for bankruptcy must complete pre- and post-filing credit counseling. According to the Federal Trade Commission, pre-bankruptcy counseling includes an evaluation of your finances, a discussion of alternatives to bankruptcy, and the development of a personal budget plan. This counseling must take place within six months prior to filing.
After you complete the counseling and your lawyer turns in all your required forms, a court date will be set. In most cases, you must attend the hearing. The bankruptcy trustee will review your documents, and the court-appointed bankruptcy trustee—as well as any of your creditors—may ask questions about your bankruptcy petition.
After the court date, you are required to complete post-filing debtor education that includes information on money management, credit usage, and budgeting.
The Emotional Effects of Bankruptcy
According to Deborah Thorne, associate professor of sociology at Ohio University, people go through different levels of stress, depression, and insomnia while struggling financially. In her research during the last 10 years, Thorne has found that the majority of people who file for bankruptcy struggle for two years before deciding to file and go through a lot of stress during that time.
"[This] stress is driven by collection calls, wage garnishments, and figuring out how to rob Peter to pay Paul," says Thorne. Fear, especially regarding the court hearing, is also a big factor.
Thorne’s research has found links between financial problems and health problems such as high cholesterol and losing or gaining weight. Women are more likely to suffer from depression, says Thorne, while men are more prone to anger regarding their circumstances.
The emotional process of dealing with financial hardship usually begins with feeling hopeful about gaining control over debt and ends with feeling helpless because bankruptcy seems like the only option, adds Thorne.
"Essentially you're being pushed down a canyon that is getting smaller. The walls are pretty steep," says Thorne.
My Life after Bankruptcy
After filing for bankruptcy, I began to set new financial goals and started the process of recovering my credit score. Two years after filing, I got a new credit card, with a small limit, to begin rebuilding my credit. For a year, I maintained less than a $50 balance on my new card each month. Then, when my credit card company increased my credit limit from $300 to $1,800, I had a massive anxiety attack. I had not prepared myself for such a large credit limit so soon after declaring bankruptcy.
Now, four years later, my bankruptcy still affects every financial decision I make. Because my bankruptcy is public record (and will be for another four years), I continue to face anxiety every time I fill out an apartment application or interview for a job.
Despite participating in required pre- and post-filing counseling sessions, I continue to struggle with maintaining a budget. However, I am committed to being as debt free as possible and to setting realistic financial goals.
[Any reference to a specific company, commercial product, process, or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]