Filing for bankruptcy can provide a fresh financial start if you’re overwhelmed by debt, but it’s important to understand the process and its implications. Bankruptcy is a legal procedure that allows individuals or businesses to eliminate or reorganize their debts under the protection of a federal bankruptcy court. Here’s what happens when you declare bankruptcy.
1. Types of Bankruptcy
The two most common types of bankruptcy for individuals are:
- Chapter 7 Bankruptcy (Liquidation): This involves selling non-exempt assets to pay off creditors. Most unsecured debts, like credit cards and medical bills, are discharged.
- Chapter 13 Bankruptcy (Reorganization): This allows you to keep your assets while setting up a repayment plan to pay off debts over 3–5 years.
Businesses often file under Chapter 11, which is similar to Chapter 13 but tailored for large-scale reorganization.
2. Filing for Bankruptcy
The process begins with filing a petition in bankruptcy court. This includes submitting detailed financial information, such as:
- A list of all debts and creditors.
- A list of assets and liabilities.
- Income and expenses.
You’ll also need to complete a mandatory credit counseling course from an approved agency before filing.
3. Automatic Stay
Once you file, an automatic stay goes into effect. This is a court order that stops creditors from taking collection actions against you, such as:
- Wage garnishment.
- Foreclosures.
- Repossession.
- Harassing phone calls.
The automatic stay gives you breathing room while the bankruptcy process unfolds.
4. Trustee Assignment
A bankruptcy trustee is appointed to oversee your case. The trustee’s role depends on the type of bankruptcy:
- In Chapter 7, the trustee liquidates non-exempt assets and distributes the proceeds to creditors.
- In Chapter 13, the trustee reviews your repayment plan and ensures you make payments on time.
5. Creditor Meetings
You’ll attend a 341 meeting of creditors, where the trustee and creditors can ask questions about your finances. This meeting is informal and typically doesn’t involve a judge.
6. Debt Discharge or Repayment
- In Chapter 7: After liquidating assets, eligible debts are discharged, meaning you’re no longer legally required to pay them. Certain debts, such as student loans, child support, and taxes, are usually non-dischargeable.
- In Chapter 13: After completing the repayment plan, remaining eligible debts are discharged.
7. Impact on Your Credit
Bankruptcy significantly affects your credit score and remains on your credit report for:
- 10 years for Chapter 7.
- 7 years for Chapter 13.
Rebuilding credit is possible over time with responsible financial habits.
8. Long-Term Implications
While bankruptcy provides debt relief, it has lasting consequences:
- Difficulty obtaining loans or credit.
- Higher interest rates.
- Potential impact on housing and employment opportunities.
Conclusion
Bankruptcy is a powerful tool for financial relief, but it’s not a decision to take lightly. Consult a bankruptcy attorney or financial advisor to explore all options and determine the best course of action for your circumstances.
Contact FKMALaw.com and find out how we can help you!