Debt is an ever-present, looming threat for most modern American families and even though bankruptcy can be an escape from the most serious of debts, it is feared. A lot of that fear stems from a lack of knowledge, and that’s what we will try to fix in this guide as we ask, How does bankruptcy work and how can you file for it?
How Often Can you File for Bankruptcy?
Bankruptcy may seem like an easy way out, and to an extent it is, but you should still avoid it at all costs and one of the main reasons for that is that you can’t keep filing every time you get in trouble. In fact, if you file a chapter 7 then you will need to wait for over 8 years before you can file again.
If you file a chapter 7 and want to file a chapter 13 afterwards, you need to wait for 4 years, while the reverse scenario (chapter 13 first and then chapter 7) requires a wait of at least 6 years.
If you want to file a chapter 13 after having filed one previously then the waiting time tends to be much less. To learn abut the different types of bankruptcy and which one you should apply for, take a look at our guide to Chapter 13 vs Chapter 7 Bankruptcy.
How Much Does Bankruptcy Cost?
Bankruptcy isn’t free and the price you pay will depend on the type of bankruptcy that you file. A chapter 7 bankruptcy will cost you $335, while a chapter 13 requires a payment of $310. If you hire a bankruptcy lawyer to help you with the process then you will also be expected to pay for their fees, which can be considerable.
Of course it wouldn’t make sense to demand an instant payment from someone for them to make an official claim about having no money. So if you can prove that you can’t pay all of the money in one go then you may be allowed to pay in installments.
You may also be required to pay for financial management lessons and for debt counseling, which can cost anywhere put up to $100. These costs can be off-putting, but they are an essential part of the process. In the case of a bankruptcy lawyer, they can help you with exemptions ad payment plans, while also reducing the length of time it takes and the amount of stress involved.
How Long Does it Take to File?
There is a typically a three to four month wait from the moment you file a chapter 7 bankruptcy to the moment you receive a discharge. A chapter 13 bankruptcy is based on an a agreement that you will pay back your creditors over a period of three to five years and you will likely start making payments within 2 months of filing.
Can you File for Bankruptcy on Medical Bills?
In our guide to the Cost of Healthcare in the United States we discussed how US healthcare is the most expensive in the world and how it has led to an epidemic of debt, with many Americans losing everything because a disease, a disorder or even an accident has led to unscalable medical debt.
This is not something that happens in other countries (for the most part, healthcare is free in Europe, and in other countries it’s a lot cheaper than it is here) and it is not something that should be happening here. But it is.
Fortunately, there are ways out and bankruptcy is one of them. In fact, medical debt is one of the most common reasons people apply for bankruptcy, which means countless others have gone down this route before you.
When you apply for bankruptcy your debt will be separated into several different categories, including priority debts that will not be written off and must be paid first. This includes tax (more on that below), but it does not include medical debt. In fact, medical debt is treated as unsecured debt, which puts it in the same category as payday loans and credit cards.
You can use a chapter 7 and a chapter 13 to clear these debts. If you apply for a chapter 7 and you pass a means test then you can clear any amount of medical debt. If you apply for a chapter 13 then it will be added to other unsecured debts and will become part of your payment plan. In this case, however, if the debt exceeds a certain amount then you may not be able to file.
Can you File on Taxes?
In most cases you will not be able to write-off your tax debt with a bankruptcy filing. If you file for a chapter 13 bankruptcy then your tax debt will be included in your repayment plan, and you will be required to repay them in full. If you file for a chapter 7 then you will likely continue to owe taxes even after the bankruptcy case has ended.
However, there is an exception if all of the following conditions are met:
- Your taxes are income taxes.
- You did not commit fraud or tax evasion.
- The debt has existed for a minimum of three years.
- You filed a tax return for the debt at least two years before filing for bankruptcy.
- You meet the “240-day rule”, whereby the debt was assessed at least 240 days before you file.
More About Bankruptcy
A lot of you have asked us about student loan debt and bankruptcy and whether the latter can negate the former. As with tax debt and medical bills, there are rules and criteria involved that make this a rather complicated issue.
That’s why we have devoted an entire guide to this subject. To read this for yourself and discover if you can wipe-out your student loans following a bankruptcy, read our guide to Bankruptcy and Student Loans. If you find yourself in this situation you may also want to read the following guides, which can be equally helpful: