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Multiple Bankruptcies: How Often You Can File One?
Bankruptcy is a legal way to reduce debt and start over financially. The process is governed by the rules of U.S. Federal Court, and documents associated with bankruptcies become court records.
Only about 12 percent of Americans have ever filed for bankruptcy. That translates to about 500,000 annually in recent years. Individuals declare bankruptcy more often than businesses, which only account for about ten percent of the total.
Individuals and businesses can use bankruptcy to settle accounts with creditors. The most common reasons for declaring bankruptcy include:
- Overwhelming medical bills
- Job loss
- Declining income
Who files for bankruptcy? The statistics show that most are married, with high school educations, and making under $30,000 per year. The states with the most bankruptcies are:
How Often Can You File Bankruptcy?
There is no limit to the number of times you can file for bankruptcy. Still, there are waiting periods between resolving one case and starting another. In fact, “Chapter 20” bankruptcy is shorthand for those who file for Chapter 7 and then Chapter 13 in rapid succession (Chapter 20 doesn’t exist otherwise). Multiple bankruptcies are not uncommon.
How Bankruptcy Works
The first step in declaring bankruptcy is deciding which category fits best. Bankruptcy no longer means giving up all of your possessions or home in favor of reaching agreements with creditors about the repayment of debts.
Certain types of debt cannot be erased or reduced by bankruptcy, including child support and student loans. Court judgments in cases of willful or reckless injury to another person and most tax liens may not be discharged in bankruptcy. All bankruptcy records become public records and are searchable on the federal courts’ Pacer website.
Steps in Bankruptcy
Almost all categories of bankruptcy involve the same process, regardless of how often you file for bankruptcy. In general, these are the steps:
- Determining which category of bankruptcy to file.
- Disclosing all accounts and assets as well as debts.
- Agreeing to liquidation or a schedule of repayment set by the bankruptcy court.
- Following through with payments and other specifics of the court’s plan, which often includes taking a class on financial management.
- Petitioning for a discharge from bankruptcy after completion of the court’s plan.
Filing Bankruptcy Cases Under Different Chapters
Chapter 7 bankruptcy – this is the fastest way to reduce debt. Chapter 7 is used by individuals seeking to wipe out unsecured debt (credit cards, personal loans, etc.). It requires the applicant’s income to be below the state average. The court may require liquidation of certain personal possessions above exempt limits: your vehicle and home may be exempt if they fall below a specific valuation. Your retirement funds and minor personal effects are likely to be exempt. This type of bankruptcy stays on your credit report for ten years.
Chapter 13 bankruptcy allows you to keep assets like your home and primary vehicle according to state valuation schedules. The process is longer, focusing on reaching agreements with your debtors for repayment, such as reducing your mortgage payments in exchange for catching up with missed payments. Chapter 13 can be completed in three to seven years. A trustee serves as an intermediary for paying creditors. Chapter 13 stays on your credit report for about seven years.
Chapter 11 bankruptcy is used by individuals and businesses, providing a route to staying in business by restructuring. This can include selling some assets and settling with creditors to reduce debt. The court-appointed trustee overseeing the case helps to negotiate with creditors to reduce total debt and make repayment plans workable. This stays on your credit report for up to 10 years.
Filing for Bankruptcy Under the Same Chapter
Many people file for multiple bankruptcies. A knowledgeable advisor can help you decide whether one filing is enough to improve your financial situation. In some cases, filing more than one type of bankruptcy, in succession will reduce different kinds of debt. Waiting for the appropriate period between filings is key, even if it means the bankruptcy stain on your credit score lasts longer.
If you seek to file Chapter 13 after discharging unsecured debts through Chapter 7 bankruptcy, you must wait four years. If you want to file Chapter 13 again after going through the Chapter 13 process, you must wait two years. Filing Chapter 7 bankruptcy after going through Chapter 13 requires a six-year waiting period unless you’ve completed the court’s requirements, which may allow a shorter waiting time. Filing Chapter 7 after going through Chapter 7 requires an eight-year waiting period. Ultimately, a court may alter these rules about how often can you file for bankruptcy.
Filing for Bankruptcy Without a Discharge
Not waiting long enough between two bankruptcy filings is a key reason why cases may not be discharged. A discharge is a court order that states creditors have been paid off and a bankruptcy filing resolved. Creditors may object to a discharge, as may bankruptcy trustees who believe assets were concealed or that the person filing for bankruptcy tried to skirt full financial disclosure.
If the court has dismissed a bankruptcy filing, there is usually no waiting period before refiling. A dismissal means that the bankruptcy was not successfully completed.
Mortgages, Car Loans, and Other “Secured” Loans
Different kinds of debts are treated differently under bankruptcy. Secured loans, attached to a physical item of value like a vehicle or a home, might be restructured under Chapter 13. The terms of the loan can be adjusted to make payments easier as long as you catch up with past-due amounts. Secured loans are rarely wiped out like credit card debt may be. Chapter 7 bankruptcy may erase your legal obligation to pay your mortgage, but it doesn’t mean you get to keep the home for free. The mortgage bank will have a lien on the property that is the same as ownership.
Taxes, Support Obligations, and Other “Priority” Debts
Priority debts are a category that cannot be wiped out by bankruptcy. These include back taxes, child support, and even homeowners’ association fees.
Federal student loans, used to pay for higher education, may not be wiped out in bankruptcy filings.
Strategy To Use in a Second Filing
For individuals with overwhelming debt, filing for bankruptcy twice in succession can be strategic. One approach is filing Chapter 7 first. That knocks down unsecured debts like credit cards and personal loans. After the waiting period, then file for Chapter 13 to reduce payments and reorganize debts that cannot be wiped out (secured loans).
Credit Report and Multiple Filing
Bankruptcy negatively impacts your credit report, compromising your ability to qualify for housing leases, some jobs, and most loans. The status stays on your report for up to 10 years. Adding a second filing on top of the first is likely to be negative as well.
Credit counseling may effectively take the place of filing bankruptcy. Consumers may successfully negotiate lower mortgage rates or loan repayment terms themselves. These efforts do not result in having bankruptcy recorded on your credit score.