For millions of Americans, no words are strong enough to describe the shame and sense of failure generated by the dreaded letters of BK, the standard shorthand to describe bankruptcy. Bankruptcy is rightly viewed as the neutron bomb of personal finances--one that never should be used unless all other options are exhausted. How long a filing follows the luckless debtor, however, depends greatly on the type of bankruptcy being filed, and how closely their situation falls within those boundaries. As a quick review demonstrates, the answers are far from simple or clear-cut.
Summary
The length of time to emerge from a bankruptcy proceeding depends greatly on what option is pursued, which typically runs along three different lines--Chapters 7, 11 and 13. No matter what option the debtor uses, however, the same thought process is required to consider whether a bankruptcy filing is worthwhile. Generally, if enough money exists to pay off all debts within three years--once the monthly bills are subtracted--there may be no reason for filing. Bankruptcy is also considered pointless if there is no property for creditors to seize, such as cars, or homes. Conversely, the greater the non-dischargeable debt load, the more sense it might make to file for bankruptcy.
Chapter 7 Bankruptcy
A Chapter 7 filing is the most straightforward option, because it simply means the discharging of personal debt. The process begins with a detailed listing of all debts, property and other relevant financial information with the bankruptcy court in charge of the debtor's home area. A meeting follows with the bankruptcy trustee, who reviews the information. Unless a creditor objects to a particular piece of information, or there are problems with the application, the whole process takes four to six months.
Chapter 13 Filings
Chapter 13 filings, which typically focus on repayment or reorganization plans, are more complicated. The process begins with a submittal of all creditors' names and addresses to the court, followed by a detailed listing of assets and liabilities; expenses and incomes; the debtor's financial history to date; and a plan spelling out how the reorganization will occur. As in Chapter 7, a meeting with the bankruptcy trustee is required, and creditors have the same opportunity to raise objections, or ask questions. Due to the extra layers of steps involved, Chapter 13 bankruptcy filings can take 36 to 60 months--the maximum time period that federal law allows for a plan's completion.
Considerations
Typically, bankruptcies stay on a debtor's credit report for seven years. The figure may balloon to 10 years during a tighter credit market, such as those experienced during the savings and loan scandals of the 1980s, or the housing meltdowns of 2007-08. In that scenario, lenders will look harder at specific problems associated with a poor credit score, such as the racking up of late payments after a bankruptcy filing. Higher interest rates will be a given, while the actual filing is a matter of public record--and available to anyone who cares to look it up. This step can have unpleasant consequences, since more employers are using credit screening for jobs that require people to handle money--or see if an applicant's debt load may lead to more requests for bonuses and raises.
Warnings
On a positive note, if there is one, bankruptcy does offer the chance for a fresh start, beginning with some breathing space from creditor harassment by mail, or phone. On the negative side, debtors will need to exercise great caution before they take on any new debt, and creativity when it comes to financing--since policies vary dramatically from lender to lender. Some are concerned only with a stable employment history and signs of success in rebuilding credit, such as by using secured credit cards. Others may look at the creditor's inability to maintain steady payments or income in their past as sufficient grounds for denying a loan, or offering one with higher interest. As always, independent legal advice from a bankruptcy attorney is highly recommended.
