Bankruptcy Considerations: Before You File

Written by: Lexus (she/her)

3 min read | Published: January 23, 2025

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If you’re in a position where you feel as though you’ve exhausted all options and you're considering filing for bankruptcy, there are a few things you should know before moving forward. Let’s review some important facts so you can make an informed decision.

Chapter 7 vs. Chapter 13

Two types of bankruptcy are commonly filed. Chapter 7 focuses on getting rid of certain unsecured debt, including personal loans, medical debt and credit cards. This filing is appropriate for simpler cases. In comparison, Chapter 13 focuses on allowing you to catch up on your current secured debts, such as mortgages or auto loans, but still manages to discharge the unsecured debt. It puts an emphasis on the fact that you do plan to pay what’s owed on the secured debt, allowing you to keep the property.

Bankruptcy Doesn’t Erase All Debt

A common misconception about bankruptcy is that this legal process will eliminate all of your debt. This is, unfortunately, incorrect. Some forms of debt don’t qualify for bankruptcy, including taxes, child support and alimony. Keep in mind that the type of debt you have plays a role in whether it can be included in your bankruptcy filing. For example, if you have a loan that is secured by collateral, the lender has the right to obtain the object of value even if it’s included in your bankruptcy filing. If a debt is unsecured — like a personal loan or credit card — there is nothing that can be repossessed by the lender, so it can be wiped out via bankruptcy.

No Sense of Urgency

The entire legal process of bankruptcy can take a long time depending on court proceedings and communication between the lender, borrower and the court system. If you’re filing Chapter 7, this process can take anywhere from four to six months from start to finish. If you’re filing Chapter 13, it can take as long as three to five years. Knowing ahead of time what chapter you will be filing can give you a better grasp of your timeline.

Complex Procedures and Costly Outcomes

With the amount of legal paperwork and terminology involved, bankruptcy can be complicated. It’s advisable to hire an attorney with experience in bankruptcy cases to help you navigate the process. If you choose not to have an attorney present to represent you in court, you risk having your case dismissed due to misinterpreted documents. While hiring an attorney comes at a cost, if you choose not to hire representation, your chances of a positive outcome may be significantly lower.

Impact on Credit

One of the biggest impacts of bankruptcy that will affect you well after filing is your credit. Once the bankruptcy is listed on your credit report, your credit score is likely to decrease significantly. This information will remain on your credit report for up to seven years for Chapter 13 bankruptcies and up to 10 years for Chapter 7 bankruptcies. During this time period, you may have more difficulty getting approved for new credit and loans. If you were considering purchasing a home, you will have to wait a few years before you can qualify for a mortgage due to seasoning requirements.

Deciding to file for bankruptcy can be a difficult decision. It’s important to make sure you have reviewed all possible options before turning to the court system. If you’re unsure about your decision, reach out to your financial institution or a financial adviser. They may have additional resources and debt consolidation options for you to explore. Ask as many questions as possible, because once you make the decision to file for bankruptcy, it will take a long time to rebuild your finances.