What Happens When You File for Bankruptcy?

Bankruptcy can feel like a daunting process. You should understand the types of bankruptcy available and what happens after you file. For most individuals, the options are Chapter 7 or Chapter 13 bankruptcy. Chapter 11 bankruptcy is generally used by businesses seeking to restructure or reorganize their debt. Chapter 12 bankruptcy is only available to family farmers and fishermen.

Bankruptcy can provide immediate debt relief, but there are long-term consequences. Talk to a bankruptcy attorney if you have questions about your bankruptcy case.

What Happens After You File Your Petition With the Bankruptcy Court?

Before filing for bankruptcy, the Bankruptcy Code requires debtors to complete a credit counseling course. When you file the bankruptcy petition, the court issues an “automatic stay” on most (or all) of your debts. This means creditors and debt collectors cannot contact you or attempt to collect outstanding debt. Also, the automatic stay bars creditors from commencing or continuing a lawsuit against you to collect on a debt.

Most debts, repossessions, foreclosure proceedings, collections actions, and wage garnishments stop during the bankruptcy process.

Appointment of a Trustee

What happens when you file depends on the type of bankruptcy. It is different if you file Chapter 7 bankruptcy or Chapter 13.

After you file a Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to create a bankruptcy estate comprised of your non-exempt assets. The trustee then liquidates these assets to repay your creditors.

In a Chapter 13 bankruptcy, the court appoints a trustee to administer the case. Instead of selling off your assets, the trustee will oversee your Chapter 13 repayment plan. The plan will periodically provide fixed payments to the trustee, who will then distribute to creditors under the plan’s terms.

How Does Bankruptcy Affect My Property?

Your assets will be affected differently depending on the type of bankruptcy you file. Your assets shouldn’t be in jeopardy in a Chapter 13 bankruptcy proceeding because you will continue making regular, affordable payments on your debts.

Conversely, Chapter 7 bankruptcy is liquidation, meaning your non-exempt assets are seized by the court and sold to repay your creditors. Generally, the courts will consider all items deemed essential to modern life exempt from bankruptcy proceedings. Examples of some exempt assets include:

• Limited equity in a vehicle
• Jewelry
• Clothing
• Tools of the trade
• Homestead exemptions

Some states choose to follow the federal guidelines, whereas others will require debtors in their state to follow state law. Some states allow you to choose between federal or state exemption laws. You should understand your state’s applicable exempt and non-exempt property laws before filing for bankruptcy.

How Does Bankruptcy Affect My Debts?

When Chapter 7 or Chapter 13 bankruptcy proceedings conclude, the debt discharge absolves you of most of your debt. You no longer have to pay anything on discharged debts, and creditors cannot collect on them.

Some debts are not discharged in bankruptcy. The most common examples are alimony payments, child support payments, student loans, and certain taxes. All other debt is potentially dischargeable. Credit card debt is one of the most common types of debt discharged by bankruptcy.

However, any debts you take on after you file your bankruptcy petition — will remain your responsibility.

Some people choose to “reaffirm” secured debts in bankruptcy so they don’t have to sell assets like a house or a car in bankruptcy. It is a promise by the debtor to the creditor to continue paying off those mortgage or car loan debts after the bankruptcy is over.

How Does Bankruptcy Affect My Credit?

Filing for bankruptcy will severely hurt your credit score. However, not filing for bankruptcy and piling up more debt can be more detrimental. Your credit score will take a significant hit, but you’ll get to start over and make fiscally responsible choices.

A Chapter 7 bankruptcy will remain on your credit report for up to 10 years. In comparison, Chapter 13 will stay on your credit report for up to seven years. Under both Chapter 7 and Chapter 13, discharged debts will remain on your credit report for up to 7 years after discharge.

Since Chapter 7 debts are discharged within months after filing, they may remain on your credit report for less time than those discharged under Chapter 13. Many of your debts under Chapter 13 remain active until discharge at the end of the three to five-year repayment plan.

Seek Dedicated Legal Expertise

Retaining the services of a bankruptcy lawyer might help you navigate the complexities of bankruptcy law. Talk to a bankruptcy lawyer about the best options for your financial situation and how they can help you through the bankruptcy process.