How Bankruptcy Works

Bankruptcy is one of those topics no one wants to think about. Admitting you can’t pay your bills kind of sucks, especially if you live in the US, where we are taught from birth that it’s our duty to pull ourselves up by our bootstraps and contribute to society. We know we’re supposed to pay back what we owe, and that’s the way it should be. But what happens when you just can’t handle all your expenses and don’t know how else to fix it?

Despite our best intentions, sometimes bankruptcy is the only way out of a bad situation. I filed for Chapter 7 in 2006 after my overspending, inability to find a job, and stupid choices caught up with me. There was no way I was going to ask my friends or family for advice - I knew none of them had ever dealt with something so embarrassing. (I was actually wrong about that one. Plenty of people have filed bankruptcy; they just don’t talk about it.) While I found a lot of good information online, I also found a lot of BS that made me more ashamed and scared than I already felt.

I’m far enough beyond my bankruptcy to stop feeling ashamed of it. Was it a great moment in my life? Of course not. But I refuse to let fear or embarrassment keep me from using what I know to help other people. If you want to know exactly what steps you need to take to file for bankruptcy protection, you’ve come to the right place.

What is bankruptcy?

Put very simply, bankruptcy is a process that allows someone to wipe out their debt. It’s not magic, and it definitely comes with drawbacks, but it IS possible to just start over with a clean financial slate in the US.

There are two types of bankruptcy for individuals and couples: Chapter 7 and Chapter 13. These names refer to the chapter of the bankruptcy laws governing each type. Chapter 7 means you have so much debt, you could never pay it off with your current income. It will be wiped out completely in bankruptcy. Chapter 13 means you could pay off your debt if the interest rates weren’t so high. In Chapter 13, you are set up on a five-year, interest free payment plan to repay as much of the debt as you can. Since I filed Chapter 7, that’s my frame of reference and that’s what I will be talking about, though the process is very similar for both types.

With either type of bankruptcy, your credit will basically be ruined. The black mark will remain on your credit report for at least 7 years, during which you’ll have a hard time obtaining new credit or making any large purchases. So this isn’t something you do just because you feel like it - bankruptcy is designed to be a last resort.

Where do I start?

If you are considering bankruptcy, you can meet with an attorney for a free consultation. I actually recommend that you meet with several attorneys to find someone you like (plus a second opinion never hurts!). Just look online or in the yellow pages for a list of attorneys in your area, then call and ask to set up a bankruptcy consultation. At this meeting, you’ll need an estimate of all the debts you owe - you don’t have to get too detailed yet. The attorney will tell you whether you can avoid bankruptcy based on your income and expenses.

This is your opportunity to ask questions for free, so use it wisely. Come prepared with a list of things you want to know. Bankruptcy laws differ a little in each state, so it’s your responsibility to make sure you understand exactly what you’re doing.

So I’m going to file. What will the attorney need from me?

I decided to file for Chapter 7 during my third and final consultation. I knew there was no other way to get out of the hole I’d dug for myself, especially after 3 consecutive lawyers told me I didn’t have any other choice.

I took home an enormous packet from the attorney’s office to fill out. I actually put it off for about a week because it was so overwhelming! I had to write down every creditor, the address where I sent payments, the total balance, the full account number, interest rate, etc. etc. I had to hunt down bank statements, credit card statements, vehicle titles, pay stubs, student loan documents… It was probably the worst part of the whole process.

I also had to go through every room in the house and make a list of the stuff we owned, then assign it a monetary value. This is something everyone fears - Are they going to take away all my stuff? Generally, no. My attorney told me to price everything like I was holding a moving sale. My living room list looked like this:

  • Couch and loveseat - $100
  • Coffee/end tables: $25
  • Entertainment center: $25
  • TV, VCR, DVD player: $125
  • Movies, accessories: $75

Every state tells you how much stuff you can keep. In my state, the limit was $8500. (This doesn’t include your house or vehicles, but it does include the balances in any bank accounts.) We were nowhere close to the limit, even with all the guns my ex owned due to his job in law enforcement. Now if you have all kinds of expensive jewelry or antiques, that’s a different story. And why would you be filing for bankruptcy anyway?

Once I had all my information together, I called to make another appointment with my attorney of choice.

It costs WHAT?!?!?!

At the second appointment, I got the bad news. It would cost $1200 total to file. I was infuriated.

“If I had $1200, I wouldn’t be bankrupt!” I screamed at the lawyer.

“And if you weren’t bankrupt, you wouldn’t need $1200,” he shot back. See? This is why I loved that man.

Most attorneys will advise you to stop making your credit card payments if you are definitely going to file for bankruptcy. After all, you’re just going to get rid of the debt, so why send them more money? So that’s what we did. Looking back, I don’t recommend this if there is ANY other way you can get the money to file. More about that later, but if you can hold a yard sale, sell a car, take out a loan, or borrow from family, now is the time to do it.

You can make payments on the filing fee and attorney fees, but your bankruptcy won’t actually be filed with the court until the balance is paid in full. So in the meantime, you’re still dealing with collection calls, harassing letters, and more stress than any person can handle.

What happens after I pay?

A couple things have to happen after your payment but before you file. First, the attorney’s office will pull a credit report. Not the kind you get online, but this scary credit report that only lawyers can access. It lists things you don’t even remember! Mine was about 30 pages long and I was only 23 years old. You have to go through this report to make sure you didn’t forget any creditors, because every single person or company you owe money to must be included. Years ago, you could pick and choose who you filed on, but that just encourages people to leave a bankruptcy with debts outstanding.

You’ll also be required to attend a credit counseling course. Now, this varies from state to state, but all I had to do was sit in a room, read some stuff on a computer screen, and take a test at the end. It wasn’t what I would call “helpful.” (Obviously not since I’m here, back in debt, blogging about how bankruptcy works.) If you have the option to attend a REAL credit counseling course, I would highly recommend it.

The Period of Bliss

Once you’ve paid your money, reviewed the scary credit report, and attended credit counseling, your lawyer will file your bankruptcy petition with the court. You’ll receive a case number, which I like to think of as a ticket to freedom. Once you have a case number, you can make the phone calls stop. Yes, really. Instead of ignoring the collection calls, you’ll be sitting around waiting for them. Once you tell them you have filed for bankruptcy protection and give them your case number, creditors cannot contact you by phone, mail, or any other method. If they do, you can sue their pants off.

I remember how strange it was to turn the phone’s ringer back on. We still had a landline at the time, and we just kept the ringers off so we wouldn’t hear the calls. I would check the caller ID every night and lose sleep thinking about how many people were after us for money. Suddenly I didn’t have to do that anymore. I started realizing what a blessing bankruptcy could be.

This has been the longest post in history, so I’m going to stop here for now. Check back tomorrow for Part Two of How Bankruptcy Works.

  • Alex | Perfecting Dad

    Very cool story, hearing about it from someone who lived it! Thanks.

  • Pajesh

    been there done that…was one of the hardest grown-up things to experience.

  • michaelrice

    I love it when people post all the details like you did. I just wanted to point out a couple of things that might be different for other people around the country:

    (1) Bankruptcy attorneys fees vary quite a bit from city to city. They’re usually between $800 to $1,500.
    (2) Also, once you start paying, a lot of attorneys will intercept your creditors’ calls for you to take a little pressure off. I’m not sure why this one didn’t, but it sounds like you liked him so no biggie!

    Again, thanks so much for writing up the experience!

    • Andrea @ SoOverDebt

      Thanks for visiting! Be sure to check back for part two tomorrow - I’d love to hear any other comments or thoughts you might be willing to share.

      My attorney actually did take over dealing with creditors, just not before he got paid. And I really don’t blame him for that.

      • michaelrice

        Ah. Got it. Good to hear! Yes, looking forward to tomorrow’s post so get writing.

        • Andrea @ SoOverDebt

          Already done. Because I’ve got it like that.

  • Ken @ Spruce Up Your Finances

    Very nice detail. It’s good to know a few details of what a person may experience during the bankruptcy processing.
    I think in some cases, bankruptcy is a good option in order to have a fresh start.

  • Anonymous

    I have to admit that I love your lawyer’s response! Things must have been really bad if they all recommended chapter 7 at 23 years old!

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  • Red

    I know all about turning the phone back on. I didn’t file bankruptcy, but I got really behind on my credit card payments at one time. Collection agents were calling my cell phone all day. I started turning it on silent, so I could stop lying to my boyfriend every time he asked who was calling. So glad that’s over!

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