How Many Times Can You File for Bankruptcy?

Bankruptcy offers a legal solution for individuals and entities overwhelmed by debt. By filing for bankruptcy, debtors can obtain relief, restructure their finances, or liquidate their assets to repay creditors. Understanding the frequency with which one can file for bankruptcy is essential for anyone considering this route. 

Types of Bankruptcy

Before delving into the frequency of filing, one should understand the common types of bankruptcy:

Chapter 7 – Liquidation

Chapter 7 bankruptcy, commonly known as “liquidation bankruptcy,” stands as one of the most recognized forms of financial relief available to individuals and businesses experiencing overwhelming debt. Its primary function is to assist debtors in wiping out most of their general unsecured debt without the necessity of paying back balances through a repayment plan. Instead, the process focuses on liquidating, or selling off, a debtor’s non-exempt assets.

In the intricacies of Chapter 7 proceedings, the role of a bankruptcy trustee is pivotal. Upon filing, the court appoints this neutral third-party professional. Their responsibility is comprehensive and encompasses collecting, selling, and distributing the debtor’s non-exempt property. The trustee must ensure that this process is both fair and transparent, protecting the rights of the debtor while maximizing returns for creditors. The role demands diligence, impartiality, and a deep understanding of bankruptcy laws.

However, it’s essential to differentiate between exempt and non-exempt property. Not all assets a debtor owns are sold off during a Chapter 7 bankruptcy. Bankruptcy laws, often determined at the state level, allow for specific exemptions. These exemptions ensure that debtors aren’t left destitute and can start afresh post-bankruptcy. Commonly exempted assets might include a primary residence, a modest vehicle, personal belongings, and tools of one’s trade up to a certain value.

The proceeds from the liquidation process are not randomly distributed among creditors. There exists a hierarchy of debts, ensuring that priority claims get paid first. These priority claims often include alimony, child support, certain taxes, and wages owed to workers. Once these debts are satisfied, if there’s remaining money, it’s then distributed to unsecured creditors, such as credit card companies and medical billing companies.

Chapter 7 isn’t suitable for everyone. Individuals must qualify by passing the “means test,” which assesses their financial capacity. If one’s income is too high, they might not be eligible for Chapter 7 and may need to consider other forms of bankruptcy, such as Chapter 13. Moreover, it’s crucial for potential filers to remember that while Chapter 7 can provide a fresh start, it also comes with consequences, notably a significant impact on one’s credit score.

Chapter 7 liquidation offers a path for many overwhelmed by debt to reset their financial situation. Through the sale of non-exempt assets by a trustee, the proceeds serve to repay creditors, providing relief to the debtor. However, understanding the process, from the role of trustees to exemptions and the priority of debts, is paramount for those considering this form of bankruptcy.

Chapter 11 – Reorganization 

Primarily for businesses, this chapter allows for a reorganization of assets and liabilities. Individuals can also file under certain circumstances.

Chapter 13 – Debt Repayment

This chapter lets individual debtors propose a plan to repay all or part of their debts. Typically, repayment spans three to five years. Chapter 13, commonly referred to as the “wage earner’s bankruptcy,” primarily caters to individuals with a regular source of income. This type of bankruptcy allows debtors to formulate a plan to repay their debts over a period, typically spanning three to five years. It’s designed to enable people to keep valuable assets, like a home or car, which might otherwise be lost in a different bankruptcy chapter. However, circumstances change, and sometimes those who opted for Chapter 13 might find themselves in a position where they consider transitioning to Chapter 7.

Frequency of Filing for Bankruptcy

Chapter 7 Bankruptcy

After receiving a discharge in Chapter 7, one cannot receive another Chapter 7 discharge for eight years. So, if someone filed and received a discharge on January 1, 2020, they would not be eligible again until January 1, 2028.

Chapter 13 Bankruptcy

For Chapter 13, after receiving a discharge, one must wait two years before filing again. This means if a discharge was granted on January 1, 2020, one could potentially file again on January 1, 2022.

From Chapter 7 to Chapter 13

If one received a discharge under Chapter 7, they must wait four years before they can file under Chapter 13. 

From Chapter 13 to Chapter 7

Bankruptcy laws serve as essential tools in providing individuals a fresh start when buried under insurmountable debts. These laws are intricate, ensuring that debtors can find relief while also making certain that they do not misuse the system for undue advantage. One such nuance is the transition between different bankruptcy chapters, particularly from Chapter 13 to Chapter 7. Understanding the rules and exceptions surrounding this transition is crucial for those considering a shift in their bankruptcy approach.

A primary rule stipulates that if an individual has received a discharge under Chapter 13, they must typically wait for six years before they can file for Chapter 7 bankruptcy. This waiting period is significant, ensuring that the bankruptcy system maintains its integrity and isn’t exploited by those looking for rapid successions of debt relief.

Exceptions to the Six-Year Waiting Period

However, as with many legal frameworks, exceptions to this rule exist. The six-year waiting period can be waived if, during the Chapter 13 proceedings, the debtor managed to pay all unsecured claims in full. This means that if a debtor fully satisfied the financial obligations to creditors holding non-collateralized debts, they might be eligible to file for Chapter 7 without the extensive wait. 

A secondary exception to the six-year rule is if the debtor, during their Chapter 13 proceedings, managed to pay at least 70% of the unsecured claims. This isn’t a mere checkbox; the repayment plan associated with this 70% repayment must have been proposed in good faith. The term “good faith” is instrumental here. It ensures that the debtor genuinely attempted to honor their obligations to the best of their ability, and the repayment plan was not a scheme to bypass the system. Moreover, the proposal should represent the debtor’s best effort, indicating they didn’t deliberately undersell their repayment capacity.

The transition from Chapter 13 to Chapter 7 is laden with rules and stipulations designed to balance the scales of justice. While the six-year waiting period might seem daunting, it’s in place to preserve the sanctity and purpose of the bankruptcy system. However, the presence of exceptions acknowledges that in some situations, debtors genuinely do their best and should not be unduly penalized. As always, before making decisions in the complex realm of bankruptcy, consultation with an experienced bankruptcy attorney is paramount to navigate the nuances and make informed choices.

The Impact of Multiple Bankruptcies

Repeatedly filing for bankruptcy might have consequences. Here are some points to consider:

Impact on Credit

Every time one files for bankruptcy, it reflects on their credit report. A Chapter 7 bankruptcy remains for ten years from the date of filing, while a Chapter 13 stays for seven years from the filing date. This can hinder one’s ability to obtain new credit, limit opportunities for competitive interest rates, or affect other financial transactions.

Automatic Stay Duration

An automatic stay stops most actions by creditors, like garnishments, foreclosures, or evictions. If one files for bankruptcy more than once, the duration of this stay may reduce or not apply at all. For instance, if one files for a second bankruptcy within one year of the first case’s dismissal, the automatic stay will only last 30 days. For a third filing within a year, there might be no automatic stay at all.

Potential for Dismissal

Filing for bankruptcy multiple times in quick succession may make the court suspicious. They might see it as an attempt to manipulate the bankruptcy system. In such cases, the court might dismiss the new case.

Legal Fees

Each time one files for bankruptcy, they incur legal and court fees. Multiple filings can become costly.

Emotional and Mental Toll

Filing for bankruptcy can be a stressful process. Repeated filings can intensify this stress, affecting one’s mental and emotional well-being.

While the law does not limit the number of times one can file for bankruptcy, it does restrict how often one can receive a discharge. Understanding these limitations, along with the potential consequences of multiple filings, is crucial. Bankruptcy provides relief for many, but it should be approached with caution and comprehension. Always consult with a knowledgeable attorney before making decisions on bankruptcy, especially if considering filing more than once.