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What Happens When You Declare Bankruptcy?

8 min read
Philip Ahn, Attorney

by Philip Ahn, Attorney

The thought of filing bankruptcy can be scary to anyone. The stereotypes that come with filing bankruptcy and its perceived reality deter a lot of people from filing. Nonetheless, what happens when you declare bankruptcy is typically not as bad as you think. 

Regardless of the type of bankruptcy filed, the courts will issue an “automatic stay” on all debt collection activity, which will halt activities like wage garnishment, repossessions, evictions, foreclosures, etc. What happens after the automatic stay is issued depends on if you file Chapter 7 or Chapter 13 bankruptcy. 

Everyone’s situation is different. While there are similarities in all bankruptcy proceedings, differences can occur depending on the Chapter filed, your specific circumstances, and the state you live in. 

It can help to consult with a bankruptcy lawyer in your area if you are considering it as an option. Learn more about what happens when you declare bankruptcy below. 

How Bankruptcies Work

Bankruptcies involve a court proceeding wherein a judge and a court-appointed trustee examine a debtor’s finances who can no longer afford to pay their bills. The court has the final decision to approve payment plans, discharge debts, or approve liquidation of assets. 

The federal Bankruptcy Code and state bankruptcy laws help to give individuals and businesses a fresh financial start. Regardless of whether their financial problems came about due to bad luck, poor decision-making, or a struggling economy, bankruptcy is available to all who qualify. 

What Will Happen If I Declare Bankruptcy? 

Exactly what happens when you file bankruptcy depends on the Chapter filed and your unique circumstances. Learn about what will happen if you file bankruptcy below. 

Automatic Stay Issued

When you file bankruptcy, the court immediately issues an automatic stay that temporarily stops most collections activity and civil lawsuits against you by a creditor. Some debtors file bankruptcy because they need the immediate relief an automatic stay provides. When issued, it can help to halt the following types of activities. 

  • Eviction
  • Foreclosure
  • Repossession 
  • Utility Shut Off 
  • Wage Garnishment 

What Happens When You File Chapter 7?

Also called a “liquidation bankruptcy,” when you file Chapter 7, you are assigned a court-appointed trustee. That trustee is responsible for gathering information about your finances, appraising your property, and selling it to repay all or some of your unsecured debt. This means that you could lose some or all of your property when filing Chapter 7. 

Once the plan is approved, the property is sold, and your debtors are paid, you will receive a discharge of the remaining unsecured debts you owe. To qualify for Chapter 7 you must pass a “means test” to ensure your income is low enough to qualify. Learn more about chapter 7 bankruptcy.

What Happens When You File Chapter 13?

Individuals with an income too high to qualify for Chapter 7 often file Chapter 13 instead. Otherwise called a “repayment plan,” Chapter 13 is a reorganization of debts. 

It helps debtors pay back all or some of their debt through a three to five-year repayment plan, and they get to keep their property. Once the requirements of the plan are met, the rest of your unsecured debts are discharged. 

In Chapter 13, you must submit a repayment plan to the courts. Once it’s submitted, the court and your creditors can oppose or approve of your plan. If approved, you are required to meet all terms of the repayment plan and then the rest of your debts can be discharged. 

What Happens to my Credit?

No matter the type of bankruptcy filed, your credit will likely take a hit. The good news is that it will be temporary. Chapter 7 stays on your credit for ten years, and Chapter 13 remains for seven years. 

While your credit will take an initial hit, so long as you pay your bills on time and open strategic lines of credit, you can expect your credit to start rising soon after receiving a discharge. While it may take a while to reach a 700 credit score, you will likely be able to open new lines of credit soon after discharge. 

How Bad is Filing For Bankruptcy?

Contrary to popular belief, bankruptcy isn’t “bad.” For the majority of people, it’s a good thing. It helps them to erase unsecured debts, rearrange their obligations, and forge a fresh financial start. However, bankruptcy isn’t the best option for everyone. It can help to consult with your bankruptcy lawyer before filing to ensure it’s the right debt-relief choice for you. 

When Should You Declare Bankruptcy?

There is no “perfect time” to declare bankruptcy. The moment you realize that your expenses far outweigh your income is usually the best time to begin the process. However, it’s best to consult with a bankruptcy lawyer and other financial experts to ensure that bankruptcy is the best route for you. 

Since the consequences of filing are long-lasting, it’s best to consider all debt-relief options before filing. 

What do you Lose If you Declare Bankruptcy?

What you lose when filing bankruptcy depends on the Chapter filed, the property you own, and the type of debt you have. Federal and state bankruptcy statutes allow certain exemptions that allow you to keep some or all of your property. 

Any unexempted property is subject to being sold in Chapter 7. Chapter 13 bankruptcy gives debtors (that can afford to make payments) the option to repay creditors while keeping their property. 

Do You Get Out of All Debts When Filing Bankruptcy?

In short, no. You don’t get out of all debts when filing bankruptcy. Both Chapter 7 and Chapter 13 require you to repay unsecured and priority debts. Examples of these types of debts include:

  • Alimony, child support, spousal support
  • Ceratin federal and state taxes
  • Mortgage loans
  • Student loan payments 
  • Credit card debt used to pay secured debts 

It’s important to know what debts you can be relieved of and what obligations you are required to pay when filing bankruptcy. Otherwise, you may not receive the relief you are searching for when you file. 

What is The Downside of Filing For Bankruptcy?

While there are many advantages, there are potential downsides to filing for bankruptcy. They include: 

  • Immediate hit to your credit score
  • The potential loss of property
  • Employment and housing issues 
  • The requirement to pay some back-taxes

What Are The Advantages of Filing Bankruptcy? 

The most obvious benefit of filing bankruptcy is debt relief. However, there are other benefits that help encourage debtors to file. They include:

  • Eventually increased credit score
  • Immediate halt to debt collection to activity 
  • Ability to repay some or all debts while keeping your property
  • Financial fresh start

What Do you Need to do to File Bankruptcies?

While the procedure to file Chapter 7 and Chapter 13 differ, there are some similarities in each process. Listed below are the general steps that you must take regardless of the kind of bankruptcy filed. 

Collect Your Documents

Chapter 7 and Chapter 13 require you to compile your financial documents such as tax returns, bank statements, lists of property you own, assets, etc. Once collected, you, your bankruptcy lawyer, trustee, and the court can analyze your finances to ensure you qualify for the Chapter you file. 

Take Credit Counseling 

Before filing your paperwork, you must complete a credit counseling course. It costs between $10- $50. The course can be completed online, by phone, or in person. Once completed, you must include the certificate of completion in your filing. In Chapter 13, you must complete a course before you file and one before receiving a discharge. 

Complete Bankruptcy Forms

In Chapter 7, you must complete and turn in bankruptcy forms. The typical filing can range from 50 – 100 pages. Chapter 13 also requires bankruptcy forms, but also requires you to submit a repayment plan. 

In many cases, developing the repayment plan is one of the most challenging parts of Chapter 13. It can be difficult to create an easily approved plan without the help of a bankruptcy lawyer in your area. 

File Bankruptcy Forms and Pay Fee

When you file your forms, you must pay the filing fee. In Chapter 7, you may be eligible to make payments on your fee. However, in Chapter 13, fees must be paid upfront. The cost of filing Chapter 7 is $335, and it costs $310 to file Chapter 13. 

Should I Hire a Bankruptcy Lawyer?

There are no laws that require you to hire a bankruptcy lawyer. If you are filing a “straight” Chapter 7 bankruptcy and you have few or no assets, you may not need a lawyer. Since Chapter 13 is so complex, it typically requires the help of an attorney. 

No matter the Chapter you file, it’s typically recommended to consult with a bankruptcy lawyer before filing on your own. Individuals that represent themselves typically experience less success when seeking approval and discharges. 

Overall, bankruptcy lawyers can benefit you in many ways to include:

  • Mistake-free paperwork
  • Knowledge of federal and state bankruptcy codes
  • Help with negotiating with creditors
  • Representation during hearings
  • Post-discharge advice

Since most bankruptcy lawyers offer a free consultation, it’s usually in your best interest to take advantage of it to learn how they can help you. 

Contact an Unbundled Bankruptcy Lawyer Today

When filing bankruptcy, it’s in your best interest to move as quickly as possible. Unfortunately, many lawyers won’t start on your case until they are paid in full. With unbundled legal help, you don’t have to worry about that. 

Our lawyers offer affordable pay-as-you-go services. This means that they can immediately start working on your bankruptcy case. Also, Access Legal lawyers offer virtual consultations. So, you can start the bankruptcy process from the comfort and safety of your home. 

Ready to begin the journey to a fresh financial start? Get a free consultation with an unbundled bankruptcy lawyer who provides pay-as-you-go bankruptcy services in your area.

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