Which type of bankruptcy you qualify for depends, in part, on whether your annual income is more or less than the Nevada median income. Before looking at numbers and formulas, however, you should be familiar with the two main types of personal bankruptcy:
Chapter 7 Bankruptcy
Chapter 7 allows you to eliminate most unsecured debts in a matter of months in return for giving up all property that is not exempt. (Unsecured debts are debts—like credit card charges or medical bills—that aren’t backed up by specific items of property as collateral.)
Filing for Chapter 7 or Chapter 13 bankruptcy can be a life saver, but don’t rush into it before considering whether it’s the best solution for you. Under some circumstances, even if you’re facing a mountain of unpayable debts, bankruptcy may not be your best option.
When You Might Not Need (or Want) to File for Bankruptcy
If You're Judgment Proof
It you’re truly broke, you may be what the law calls “judgment proof.” This simply means that creditors can’t grab your property or your salary because there’s nothing the law allows them to take.
For most people, the goal of Chapter 7 bankruptcy is to wipe out as much debt as possible. In legal terms, this is called having your debts “discharged.”
In exchange for your bankruptcy discharge, you must be willing to turn over any of your property that is not exempt under bankruptcy law. The bankruptcy trustee in charge of your case will liquidate the property to pay as much as possible to your creditors; that’s why Chapter 7 is often called “liquidation bankruptcy.”
Chapter 13 bankruptcy lets you pay all or part of your debts in installments over a period of either three or five years. Many people who want to declare bankruptcy but have too much income to qualify for Chapter 7 end up filing for Chapter 13. Regular income allows folks in Chapter 13 to keep up with an agreed upon payment plan.
In 2020, Chapter 7 bankruptcy costs $335 in filing fees, unless you get a fee waiver from the court. And the filing fees for Chapter 13 are $310. But the cost of filing for bankruptcy is more than just the filing fee. You may also have to pay for:
Where to file your bankruptcy case depends on where you live and on whether you have a business close to home. Usually, you'll file in the federal district court closest to where you've lived for the past 180 days (six months). But if you run a business in a different district and most of your property is located there, you may have to file in the federal court serving that location.
This website focuses on the two most common types of bankruptcy filed by individuals: Chapter 7 and Chapter 13. But here’s a quick summary of the six types of bankruptcy most commonly filed under the bankruptcy code; they get their names from the chapters where they appear in the code.
Chapter 7 Bankruptcy
Chapter 7 lets individuals wipe out (“discharge”) most kinds of debt in just a few months. You get to keep certain kinds of property—for example, at least some of the equity in your home, your car, clothing, personal items, and property that is essential to your profession. This type of property is called “exempt” property, and many Chapter 7 filers find that exemptions cover most of what they own. If you have nonexempt property, the bankruptcy trustee will sell it to repay your creditors as much as possible. To qualify for Chapter 7, you must pass the “means test,” showing that your income is less than the state median income for your family size. Most bankruptcies filed in the U.S. are Chapter 7 bankruptcies. (For more information, see How Chapter 7 Bankruptcy Works.)
Chapter 13 Bankruptcy
Under Chapter 13, an individual repays some or all of their debts under a payment plan approved by the bankruptcy court. Chapter 13 bankruptcy takes three to five years to complete. Those who choose Chapter 13 usually do so because they want to protect certain kinds of non-exempt property or because they have too much income to qualify for Chapter 7. (Most people prefer to file for Chapter 7 if they qualify, because Chapter 7 allows you to erase most kinds of debt in just three to six months.) You can qualify for Chapter 13 if you have steady income and your debts don’t exceed the limits set by the bankruptcy code. (For more information, see How Chapter 13 Bankruptcy Works.)
Chapter 9 Bankruptcy
Cities or towns may file for Chapter 9 bankruptcy if they are overwhelmed by debt. It allows municipalities to develop a plan for handling debts while holding creditors at bay.
Chapter 11 Bankruptcy
Chapter 11, often called “reorganization bankruptcy” is usually used by businesses. It allows a business to work out a court-supervised plan to pay back creditors while keeping its doors open. We mostly hear about big businesses filing for Chapter 11, but small businesses or even individuals can use it, too. The trouble is that Chapter 11 is usually too expensive for smaller undertakings and anyone other than the most wealthy individuals, because it entails lots of meetings, court hearings, and big bills from bankruptcy lawyers.
Chapter 12 Bankruptcy
This type of bankruptcy is a lot like Chapter 13 except it’s available only for family farmers and fishermen. It’s specially designed to help farmers and fishermen keep their livelihoods while paying off debts under a court-approved plan. Chapter 12 has a higher debt threshold and more options to protect property than Chapter 13.
Chapter 15 Bankruptcy
Chapter 15 is for people or organizations that have debts and property in the United States and another country. Under this chapter, federal bankruptcy courts can more easily limit their involvement in the case to just the property and people in the United States.
Do I qualify for bankruptcy?
To qualify for Chapter 7 bankruptcy, you must show that either:
your income is below your state's median income for your family size, or
your income and expenses, calculated together, leave you unable to pay your debts. This is determined under a complex formula called the bankruptcy means test.
If you don't qualify for Chapter 7, you may still qualify to file under Chapter 13. To qualify for chapter 13, your debt must be under the limit set by the bankruptcy code and you must be current on your tax filings for the last four years.
Secured debt vs. unsecured debt: What's the difference?
Secured debt. A secured debt is backed up by property -- like your home or a car -- which is also known as "collateral." The creditor can take back the collateral if you don't repay the debt.
Secured debt can be voluntary -- for examle, when you get a mortgage to buy real estate or a loan to buy a car. It can also be involuntary -- say, if the government puts a lien on your property for back taxes.
Unsecured debt. Unsecured debt isn't backed up by collateral. Lenders give you credit without "security," relying on your credit history and your promise to repay. Unsecured debt can include everything from your credit cards to your gym membership, your medical bills to a loan from a friend.
In bankruptcy, unsecured debt is divided into priority and non-priority claims. If there's any money available to pay your creditors, priority claims come first. Non-priority unsecured debts are rarely paid in bankruptcy.
Common priority unsecured debts include:
legal fees related to the bankruptcy filing
child support and alimony
federal or state income taxes
a certain amount of wages and benefits owed to employees, and
claims against you for operating a vehicle under the influence of alcohol or drugs.
You're not legally required to use a lawyer to file for bankruptcy. Whether you're a good candidate for handling your own bankruptcy depends on the complexity of your financial situation and your willingness to take the time to learn the rules of bankruptcy. If you're not the type of person that is willing to carefully read a lot of information and follow instructions to the letter—or if your situation has you feeling too overwhelmed to do so—then self-help is probably not for you.
Evaluating your financial situation. If you owe only unsecured debt—like credit card charges or medical bills—you may well be able to file for bankruptcy on your own. But you must also consider are the amount and type of property you own. If you own your home, have substantial retirement savings, or other substantial assets, you may want to consult a lawyer to make sure your property is not at risk.
A good way to approach the decision of whether to hire a lawyer is to buy (and read) Nolo's book How to File for Chapter 7 Bankruptcy. It will give you a good idea of what issues may arise when you file, and flags specific situations when a lawyer's help is called for. It will also give you a good sense of whether the complexity of the filing process is something you'll want to take on alone. (If your financial situation is simple, but you just don't want to deal with the forms, you might consider a using a bankruptcy petition preparer to handle the form preparation.)
Other resources, other opinions. Lots of people have opinions on the topic of whether you should get a lawyer. Most lawyers—surprise!—think you should always have a lawyer. But, seriously, they make some worthwhile points that are worth reading as you decide what to do.
Finding a lawyer. For more information about finding a qualified bankruptcy lawyer near you, see the Lawyers section of this website.
Where do I file for bankruptcy?
Most people file for bankruptcy in the federal district court closest to where they live. However, if you run a business in a different district and most of your property is located there, you may have to file in that location.
Also, if you've moved in the past six months (180 days), you may have to file in the federal district court where you used to live. It all depends on where the greater portion of your property has been for most of the past 180 days.
Wherever you're required to file, know that you can handle most of your business with the court, including filing your bankruptcy forms, by mail. However, you will need to visit the courthouse in person at least once, for a meeting with the bankruptcy trustee.
Every state has laws that designate certain types of property (some or all of the equity in your home, some personal possessions, tools that you need for your work) that are off-limits to unsecured creditors—that is, creditors that don't have a lien on your property. Credit card debt and medical bills are the two most common types of unsecured debt.
Unsecured creditors cannot force you to sell your exempt property to pay off your debt. Even if the creditor goes to court, wins a court judgment against you, and takes steps to attach a lien to your property, you are still entitled to your exemption amount before the creditor gets any proceeds form a sale.
If you sell your exempt property voluntarily, the creditor has a right to have its lien paid from the sale proceeds before you receive anything. As a practical matter, most of the property of people who file for Chapter 7 bankruptcy is exempt, so they don't want to sell what they have. If all of your property is protected by exemption laws, you are said to be "judgment proof"—meaning that creditors can't collect anything from you, whether or not you file for bankruptcy.
One important thing to remember is that an exemption protects only the "equity" in your property. That's the difference between the value of the property and what you owe to creditors—like your mortgage lender—who have a secured interest in it.
If you owe $18,000 on a $20,000 car, you have only $2,000 in equity. If your state has at least a $2,000 exemption for motor vehicles, that will be enough to protect the car in bankruptcy—but you must continue to make the payments to the secured creditor.
On the other hand, if you own the vehicle free and clear, then your equity is the full value of the vehicle, and a $2,000 exemption would not be enough to protect it. The trustee would force the sale of the car, you would get your exemption amount, and the trustee would get the rest of the proceeds to distribute to the unsecured creditors.
To learn what property is exempt in your state, see the Exemptions section of this website.
Do I have to get credit counseling before I file for bankruptcy?
Yes. Before you file for bankruptcy, you must take a brief credit counseling class and get a certificate proving that you have done so. If you are planning to file jointly with your spouse, you can both attend the same counseling session, but each of you must get a separate certificate. You can usually take a class online or over the phone.
Many critics of federal bankruptcy law see the credit counseling requirement as a bureaucratic obstacle for already-desperate debtors. Perhaps so. But try to make the most of your 90-minute session by getting as much free information as you can. You may be able to use it as a way to get a second opinion about your financial situation, and to gauge whether bankruptcy is, indeed, the right choice for your situation. (Keep in mind, however, that a credit counselor is not legally allowed to tell you whether or not you should file for bankruptcy.)
Everyone who files for bankruptcy must attend a 341 hearing, which is also called a "creditors meeting." The meeting is conducted by the bankruptcy trustee assigned to your case. The trustee will put you under oath and may ask you questions about the information you've provided on your bankruptcy forms. Creditors may also show up at the hearing to ask you questions, but it's not common for them to do so.
Bankruptcy law also requires the trustee to ask you questions to be sure you understand how bankruptcy works and the potential consequences of filing bankruptcy, such as the effect on your credit record.
For most bankruptcy filers, this will be your only trip to the courthouse. Most court websites post schedules of 341 hearings, and when you file, you will be notified of your hearing date. When you show up for your hearing, you will find that many other people have hearings set for the same day. You will sit and wait for your name to be called--usually in a room somewhere in the courthouse or federal building, but probably not in a courtroom.