Thinking about Bankruptcy (Things You Need to Know)
Authored By: Montana Legal Services Association (MLSA)
In this article, you will:
- Learn about Chapter 7 Bankruptcy
- Find out what help is available.
This article is not legal advice. It is for you to learn about Chapter 7 Bankruptcy. Chapter 7 Bankruptcy is only one kind of bankruptcy. There are other kinds of bankruptcy. This article only explains Chapter 7 Bankruptcy. Only you can decide whether to file bankruptcy. If you are not sure whether you should file bankruptcy, you should talk to a lawyer. If you are not sure what type of bankruptcy to file, you should talk to a lawyer.
In this article, we'll answer the following questions:
- What is Chapter 7 Bankruptcy?
- What Can Chapter 7 Bankruptcy Do for Me?
- What Are the Drawbacks to Filing Chapter 7 Bankruptcy?
- Is Bankruptcy My Only Option?
- Will I Qualify to File a Chapter 7 Bankruptcy?
- Would a “Chapter 13” Bankruptcy Be Better For Me?
- When Is the Best Time to File Bankruptcy?
- What If My Situation is Urgent?
- How can Montana Legal Services Association (MLSA) help me with bankruptcy?
Chapter 7 Bankruptcy is a legal process under federal law. It can help people or businesses who are overwhelmed with debt. Bankruptcy cases are filed with a Bankruptcy Court. It costs $335 to file Chapter 7 Bankruptcy. You might qualify to have the fee waived, or make payments on it.
A Chapter 7 Bankruptcy can stop creditors from collecting debts. This includes:
- Debt Collections
- Debt Lawsuits
- Wage Garnishment or Bank Account Levy
- Car Repossession
- Utility Shut-Offs
Chapter 7 Bankruptcy can give a person time to sort out their finances. Some debts can be wiped out for good. Other debts can be brought current by a payment plan with the creditor.
Bankruptcy is not a magic fix for all situations. It is important to remember that there are drawbacks to filing bankruptcy. These include:
1. Some debts do not go away with Chapter 7 Bankruptcy. You will still have to pay these debts after bankruptcy. These include:
- Child Support and Alimony
- Student Loans
- Tax Debts
- Criminal Fines and Restitution
2. Chapter 7 Bankruptcy may not give you enough help if you have “secured” loans like home loans or car loans. These loans can’t be wiped out if you want to keep the property. When you bought the home or car, you signed a contract that said the lender can take the property if you don’t make the payments. If you file Chapter 7 Bankruptcy, you have three choices:
- Return the property to the lender. The debt will be wiped out.
- Sign a new contract with the lender, saying you will keep making payments. This will let you keep the property. However, you have to be able to show that you can afford the payments once your other debts are wiped out.
- Pay the lender what the property is worth. This will let you keep the property. However, this is only possible if you have the money to pay for the property.
However, if you file a Chapter 13 Bankruptcy, you may get more time to catch up on payments. You can get up to five years. This can make a big difference if you are behind on payments and need help getting caught up. However, you have to show that you have enough income to make the payments.
3. Bankruptcy will hurt your credit score. If you file bankruptcy, your credit score will go down. However, if you are behind on bills, your credit score might already be low.
You may not be able to get any new loans or credit for a while after you file bankruptcy. When you do get a loan, the lender may charge you higher interest. Other people who can look at your credit score include landlords, a new employer, and car insurance companies. However, your current employer cannot discriminate against you for filing bankruptcy.
4. Bankruptcy will not wipe out debts for your co-signers. If you file bankruptcy, it will only wipe out the debt for you. If you have a co-signer on a debt, he or she will still have to pay the debt.
This depends on what problems you want to fix by filing bankruptcy. You might have a problem that can be fixed without filing bankruptcy. For example:
- Debt Collector Harassment. Is your main problem that debt collectors are harassing you? You probably don’t need to file bankruptcy just for this. The law says that if you ask them to leave you alone, they have to stop calling or writing you. You will still owe the debt, but they cannot harass you about it. If they still do not stop, they are breaking the law. You may be able to sue them. They also cannot call you at all hours, call other people about your debt, threaten you with jail or bodily harm, or use abusive language. Learn more about your rights about debt collector harassment.
- Collections, Lawsuits and Garnishment. Is your main problem that you have debts that are going to collections or lawsuits? Collections and court judgments can be very stressful. However, they are not always as bad as debt collectors make them seem. It is true that they are bad for your credit score, but bankruptcy is much worse. More importantly, sometimes a collector cannot take any money or property from you at all, even if they take you to court. How can this be? Some income and property is “exempt.” This means a creditor can’t take it to pay a judgment. If you do not make much money, or own valuable property, all your money and property might be exempt. Many Montanans are totally exempt from collectors, especially if you are on a fixed income. Learn more about exempt income and property.
- Financial Counseling. Financial counseling can help you understand your financial situation and options. The Department of Housing and Urban Development (HUD) trains and certifies non-profit housing counselors across the country. Because of this, you can have confidence that a HUD-approved housing counselor is well equipped to help you understand and evaluate your options. HUD-approved housing counselors can give advice on credit issues, renting, foreclosures, defaults, and buying a home. You can find a HUD-certified counselor near you.
If your income is less than the national median family income, you probably qualify to file Chapter 7 Bankruptcy. However, you will still need to apply for the FYOB program at MLSA to see if you qualify for that program.
If your income is more than the national median family income, the Bankruptcy Court might not let you use a Chapter 7 Bankruptcy. You can still file a Chapter 7 Bankruptcy. But the Court will look closely at your finances. If you have extra money to make some payments to creditors, the Court can make you change to a Chapter 13 Bankruptcy. Chapter 13 Bankruptcy is more complicated than Chapter 7. If you have to file a Chapter 13 Bankruptcy, you should talk to a lawyer.
This article only covers Chapter 7 Bankruptcy. MLSA is generally not able to help with any other kinds of bankruptcy. You might want to talk to a bankruptcy lawyer if you think you should file a Chapter 13. You should discuss this option with an attorney if you:
- Have a motor vehicle worth more than $2500 ($5000 in two cars for a married couple) after any loans you owe on it.
- Have equity of more than $250,000 in a house.
- Will not be able to catch up on house or vehicle payments within three months, even after other debts are wiped out.
- Have income more than the national median family income for your household size.
It is important to think about when you file bankruptcy. Certain times are better for filing bankruptcy than others. Think about the following things when planning to file bankruptcy:
Do not wait until the last minute if you might be facing garnishment, repossession, eviction, or foreclosure. It takes some time to fill out your bankruptcy forms. You cannot file bankruptcy overnight. Plan on at least two months to fill out your forms. If you are very busy or have a lot of debts, it may take longer. Do not wait until your situation is an emergency.
You should not file bankruptcy yet if you expect more large debts to come along. You can only file bankruptcy once every seven years. If you know that you will probably have more debts happening soon, you should wait to file bankruptcy. That way all those debts will be included. For example, maybe you know you have to have surgery in the next year. If you file bankruptcy now, you will not be able to include the hospital bill for the surgery. You will have to pay it.
If you are not facing garnishment, repossession, eviction, or foreclosure, you may not need to file bankruptcy. If no one in your household has employment income, and you are not at risk of losing any assets, you might not need to file bankruptcy at this point. Remember, you can only file bankruptcy once every seven years. If there is a chance your financial situation might get worse, it is wise to wait and file bankruptcy then.
If you have been unemployed but you expect to get a job soon, you may want to file bankruptcy now. Creditors can’t garnish your income when you are only receiving public benefits. Once you start earning money, you might be garnished. Also, a good time to get a fresh start is when your financial situation is about to improve.
If you usually get an income tax refund, it is usually better to file early in the year. This will save the most possible of your tax return the following year. If you file bankruptcy later in the year, more of your tax return will be taken the following spring. If your situation is not an emergency, you may wish to plan to file in January or February of the next coming year.
Your situation might be more urgent if:
- You have received notice of a foreclosure sale date;
- You have received a notice of eviction or court papers for an eviction;
- You are being garnished or are about to start being garnished, and your garnishment puts your housing, transportation, or other basic necessities at risk.
If this is your situation, talk to a lawyer right away.
MLSA provides three types of help for money problems:
- Information to File Your Own Bankruptcy (Available to everyone). MLSA has information to help you file your own bankruptcy available online. It has three parts:
- Thinking About Bankruptcy (this article) – helps you learn about bankruptcy and what help is available.
- Getting Ready to File – a checklist to help you get together all the information you will need to fill out your bankruptcy forms.
- Chapter 7 Form list – a list of information and forms to complete a Chapter 7 bankruptcy.
We recommend going through each step one at a time, in order. This information is for educational purposes only. It does not tell you whether you should file bankruptcy. If you are unsure, you should talk to a lawyer. You can also see if you qualify for more help through MLSA (see below).
- Legal Advice about Money or Housing Problems. If you have low income and qualify for MLSA services, you may be able to talk to an MLSA advocate about your money problems or housing problems. They can tell you what your legal options are. We have staff and attorneys who may be able to help you deal with debts, garnishments, and eviction or foreclosure. They can help you look for other options besides filing bankruptcy. Learn how to apply for help from Montana Legal Services Association.
- Help with Filling out Your Bankruptcy Forms. If you have low income and qualify for MLSA’s FYOB program (File your own Bankruptcy), you can get help filling out your bankruptcy forms. A trained Bankruptcy Advocate can answer your questions regarding the forms. Learn how to apply for free legal help with bankruptcy forms.
MLSA cannot provide “emergency” bankruptcy assistance. If you believe you need to file bankruptcy within the next 30 days, it may be a good idea to hire a lawyer. The Take Action Section below has information about where you can find help if MLSA is not able to help you.
- The State Bar Lawyer Referral Service may provide you with contact information for attorneys who provide the type of assistance you are seeking, for a fee. You can contact the State Bar Lawyer Referral Service at (406) 449-6577 or montanabar.org.
- Montana Legal Services Association (MLSA) can refer you to a program called Montana Modest Means. This program has attorneys who can help you file bankruptcy at a reduced rate, plus court filing costs. To see if you qualify for Modest Means, apply for help from MLSA.
- MLSA provides free civil, non-criminal legal help to eligible clients. Learn more about how to apply for free legal help in Montana.
- If you need to file Chapter 7 bankruptcy, you may be able to file your bankruptcy through Upsolve. Upsolve is a national non-profit that helps people file for Chapter 7 bankruptcy at no cost. Read about whether Chapter 7 bankruptcy is right for you and visit Upsolve's web site to see if you qualify.
- Go to our Checklist and Steps to Get Started on Filing for Bankruptcy.
- Find a checklist of the Montana Bankruptcy Court forms you’ll need to file for a Chapter 7.
- Find a HUD-certified counselor near you.