Five Steps in Filing For Bankruptcy

a man holding an empty wallet

In the United States, bankruptcy is a legal status placed on an entity that cannot repay the debts it owes to creditors. Bankruptcy is governed by federal law and is filed in a federal bankruptcy court.

A bankruptcy case begins with the filing of a petition by the debtor. The Automatic Stay goes into effect when the bankruptcy petition is filed and prohibits most collection actions against the debtor or the debtor’s property.

There are two main types of bankruptcy cases: chapter 7 and chapter 11. The most common type of bankruptcy case is a chapter 7 case. In a chapter 7 case, the debtor’s assets are sold to pay creditors, and the debtor is discharged from most debts. In a chapter 11 case, the debtor reorganizes the business and pays off creditors over time.

There were about 411,000 bankruptcy cases in 2021. Most people think bankruptcy is the end of the road, but it’s a choice. These people who filed for bankruptcy considered their options and decided they could start a new life after it. If you’re considering bankruptcy, here are five steps to take:

Bankruptcy Eligibility

You must meet specific criteria to file for bankruptcy. The first criterion is that you must be a debtor. A debtor is an individual, partnership, corporation, or other entity that owes a debt. The second criterion is that you must be insolvent. Insolvency is when your liabilities exceed your assets.

If you meet these two criteria, you may be eligible to file for bankruptcy. However, you might also need to pass the means test.

The Means Test

Even if you are eligible to file for bankruptcy, there are certain restrictions. One of these restrictions is the means test. The means test determines if you can file for bankruptcy or not.

If you want to qualify for chapter 7 bankruptcy, your income must be below the median income for your state. However, if your income is above the median, you may still qualify if you can prove that you have “special circumstances.” No income restrictions exist for those who want to file for chapter 11 bankruptcy. However, you must prove that you have a plan to repay your creditors.

Bankruptcy law book and gavel

Filing the Petition

Once you have determined that you are eligible to file for bankruptcy, you will need to file a petition with the court. The petition must be filed in the district where you live or where your business is located.

You will also need to pay a filing fee. The fee for a chapter 7 case is $335, and the cost for a chapter 11 case is $ 1,717. You might also need to serve the petition to your creditors. You can hire a process server to do this for you. It’s essential in some states as they might require process service to be carried out by a licensed process server.

Automatic Stay

Once you have filed your petition, an automatic stay goes into effect. The automatic stay is a court order that prevents creditors from taking specific actions against you.

For example, the creditor cannot repossess your car if you are behind on your car payments. If you are behind on your mortgage payments, the creditor cannot foreclose on your home.

However, there are some exceptions to the automatic stay. For example, the automatic stay does not apply to child support or alimony payments.

Creditors’ Meeting

After you have filed your petition, you will need to attend a meeting of creditors. The meeting of creditors is also called a 341 hearing.

The trustee will ask questions about your debts and assets at the meeting. Your creditors may also ask you questions. The meeting of creditors is an opportunity for your creditors to object to your discharge or the repayment plan.


If you file for chapter 7 bankruptcy, you will receive a discharge of most of your debts. A discharge is a court order that releases you from the legal obligation to repay certain debts.

If you file for chapter 11 bankruptcy, you will not receive a discharge unless you convert your case to a chapter 7 bankruptcy.

When you receive a discharge, your creditors are no longer allowed to try to collect the debt from you.

There are two things you need to know once the discharge happens. First, the discharge does not eliminate liens. A lien is a legal claim that a creditor has on your property. Second, the discharge does not stop secured debts. A secured debt is a debt that is backed by collateral. For example, if you have a car loan, the lender can always take your car if you default on the loan.

Bankruptcy is a choice that you should not take lightly. But remember that it’s never the end of the road. Now that you know the basics of bankruptcy, you can decide what is best for you and your finances.

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