It’s Your Money Column – Filing Bankruptcy is a Last Resort

Question: I am in severe financial trouble with debts, and a friend suggested I should file bankruptcy. What happens when you file bankruptcy?

Answer:  Bankruptcy may be an answer when overwhelming medical bills or other unexpected financial crises occur and people find that they have more bills than income to repay them. There are serious consequences of bankruptcy, so it should be a last resort for most people. There are costs involved in filing the legal documents, and the process usually requires the services of an attorney.  

Bankruptcy will show up on your credit report from seven to 10 years, and, even long after that time, credit applications may ask if you have ever filed for bankruptcy. Employers may not hire you if they find bankruptcy on your credit history. Employers cannot fire current employees for filing bankruptcy, but potential employers can legally reject you. Landlords may choose to not rent you a place to live. In addition to all of this, you may be charged higher interest rates on new loans if you have gone through bankruptcy.

There are two types of bankruptcy – Chapter 7 bankruptcy and Chapter 13 bankruptcy. Both types are governed by federal and state laws, and that is why it is important to hire an attorney.  

In Chapter 7 bankruptcy, most of your debts are discharged. All non-exempt property is sold and the proceeds are used to pay a portion of what you owe your creditors. Exempt property may include your home and your car if they are paid for, but there are many conditions that determine which property legally qualifies as exempt property.

Some debts fall into the category of nondischargeable and must be paid. Some of these nondischargeable debts include child support and alimony, most student loans, income taxes from the past three years and other financial obligations.

In Chapter 13 bankruptcy, you plan to repay your creditors and work out a plan to make monthly payments to the bankruptcy trustee who will then pay your creditors. The average length of time to fulfill a Chapter 13 bankruptcy is three years.

Many people with debt problems work with a consumer credit counseling service such as those affiliated with the National Foundation for Credit Counseling. A legitimate credit counseling service can help you make decisions about how to resolve your debt problems.     

Judy McKenna, Ph.D., CFP, Family Economics Specialist, Colorado State University Cooperative Extension,, 491-5772