What Is Bankruptcy and What Happens After You File for It?
Written by
Ana Gotter
Edited by
Emily Gadd
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Bankruptcy is a legal process that helps businesses and consumers get rid of their debt and repay their creditors. It can be a financial lifeline and an opportunity for people to discharge high debt for a “fresh” start.
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What to Do If You Want to File for Bankruptcy?
If you are considering filing for bankruptcy, there are a few things to keep in mind:
- You’ll need to decide if chapter 7 or chapter 13 bankruptcy is right for you. We talk more about the difference below.
- Collect your financial documentation. You’ll need to submit extensive documentation of all of your financial assets and debts. You’ll also need to declare high-value assets, like expensive artwork, for the trustee to review
- Consider speaking to a lawyer. They can help you determine which type of bankruptcy is best and fill out the paperwork properly, increasing your chances for best results.
- Take pre-filing credit counseling. All individual bankruptcy filers are required to complete pre-bankruptcy credit counseling before filing for bankruptcy. You’ll later have to take debtor education after you file and before debt is discharged.
- File the paperwork. File the petition with your local bankruptcy court. Make sure that you follow all the instructions when filing to ensure nothing is missed.
Types of Bankruptcy for Individuals
There are two main types of bankruptcy that individuals can take advantage of when needed: Chapter 7 bankruptcy, and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a liquidation proceeding, so your property may be sold to pay your debts. Unsecured debt, such as credit card debt, is wiped out. Some kinds of debt, like back taxes, child support and alimony, cannot be eliminated in a Chapter 7 bankruptcy.
When you file for Chapter 7 bankruptcy, your nonexempt assets are sold, and the money is used to pay your creditors and lenders. You can keep your exempt assets.
| Nonexempt Assets | Exempt Assets |
|---|---|
| Cash | Primary residence and vehicle |
| Investments | Furniture, up to a certain dollar amount |
| Second car or home | Clothing, up to a certain dollar amount |
| Collectibles (baseball card collection, etc.) | Jewelry, up to a certain dollar amount |
Some assets are named as being exempt by federal law, and others may be included depending on your state. Your remaining unsecured debts are then discharged, and you can start over.
In order to file for Chapter 7 bankruptcy, you must not make enough money to be eligible to file for Chapter 13 bankruptcy.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is for those who have a reliable source of income, such as income from a job, but do not make enough money to be able to pay off their debts. Chapter 13 bankruptcy is a reorganization proceeding, so your debts will need to be restructured in such a way that you can pay them off within three to five years.
If you have less than $419,275 in unsecured debt and less than $1,257,850 in secured debt, you may be eligible to file for Chapter 13 bankruptcy.
If you do, you will need to work with the court to come up with a repayment plan that repays some debts in full, including:
- Child support
- Tax debts and liens
- Secured debts like mortgages
- Some debts to unsecured creditors
You must be able to show that you have sufficient income to comply with the terms of the repayment plan and still pay your other living expenses.
What Happens After You File for Bankruptcy?
A bankruptcy filing is really only the beginning of the process. Here’s what happens next:
- A trustee will be assigned to your bankruptcy case. They will oversee the liquidation of assets, in the case of a Chapter 7 bankruptcy, or the repayment of debts in the case of a Chapter 13 proceeding.
- You will go to a 341 meeting of creditors. Creditors can attend, but they usually don’t. You’ll be asked about your debts and your assets, under oath.
- Debt collection procedures will be stopped. This is called an automatic stay.
- You will take a course on financial management to help you better manage debt in the future. This is a requirement to get your debt discharged.
- Some of your property may be sold (Chapter 7) or you may begin a repayment plan (Chapter 13).
- Your debts will be discharged.
What Happens After The Bankruptcy Has Finished
After you file for bankruptcy and the process is completed, your credit score will decrease.
A bankruptcy will remain on your credit report for seven years if you file for Chapter 13 and 10 years if you file for Chapter 7. This will make it harder — and more costly — to get a car loan or mortgage.
You’ll also need to begin any repayment plan, if you have one. But, if you adhere to your repayment plan and keep up with your other debt obligations, it’s possible to come out of bankruptcy with a clean slate.
Filing for bankruptcy can be a way out for those who have gotten into unmanageable debt, but it should not be entered into lightly. It can have a long-term impact on your credit score and your ability to borrow in the future. It’s important to only take on debt that you will be able to manage and only consider bankruptcy as a last resort.
Karen Doyle contributed to the reporting of this article.
FAQ
Bankruptcy is complicated, and it's stressful. If you still have questions, hopefully these answers can help.- What will I lose if I file for bankruptcy?
- What you'll lose if you file for bankruptcy depends on several factors, including whether you have high-value assets and equity in your home that goes beyond your state exemption. Many people are able to keep their homes and a personal vehicle during bankruptcy. You can consult a lawyer to discuss your options before filing if you're concerned.
- What actually happens when you file for bankruptcy?
- When you file for bankruptcy, it begins the legal proceedings and an automatic stay takes effect that prevents creditors from pursing collections. You'll need to complete a financial management course, disclose all financial information, attend a meeting with the creditors, and be given bankruptcy terms. If you agree to the terms, your debt will be discharged.
- What is the downside to a bankruptcy?
- The biggest downside to a bankruptcy is the impact on your credit. Your credit score will be impacted for 10 years for Chapter 7 bankruptcies and 7 years for Chapter 13 bankruptcies, which can make it difficult to obtain new loans, credit, and more. In some cases, you may also be required to sell or surrender assets that aren't exempt.
- Is declaring bankruptcy ever a good idea?
- Yes, declaring a bankruptcy can be a good idea for individuals who have seemingly insurmountable debt and need help getting out from under it. It can be particularly advantageous to those who will be able to keep their homes based on equity exemptions, which vary by state.
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- FindLaw. "Chapter 7 Bankruptcy."
- FindLaw "What Happens After Bankruptcy?"
- Judicial Conference of the United States. "Revision of Certain Dollar Amounts in the Bankruptcy Code Prescribed Under Section 104(a) of the Code."
- NOLO "Texas Bankruptcy Exemptions"
- NOLO "California Bankruptcy Exemptions"
- NOLO "The Federal Nonbankruptcy Exemptions"
