Are you struggling with debt and considering bankruptcy? It may seem daunting, but sometimes it's the best option to get back on track. Let's walk through what happens when you file for bankruptcy.
First, it's important to understand that there are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13. Chapter 7 involves liquidating your assets to pay off your debts, while Chapter 13 involves creating a repayment plan over a period of three to five years. Your income, assets, and debts will determine which type of bankruptcy you qualify for.
Once you've determined which type of bankruptcy is right for you, you'll need to file a petition with the bankruptcy court. This will include a list of your assets, debts, and income, as well as any contracts or leases you have. You'll also need to complete a credit counseling course before filing.
After filing, an automatic stay goes into effect, which stops creditors from collecting on your debts. You'll attend a meeting of creditors, where you'll answer questions about your finances under oath. If you filed for Chapter 13, you'll also need to attend a confirmation hearing to approve your repayment plan.
If your bankruptcy is approved, your assets may be sold to pay off your debts. However, some assets may be exempt, such as your primary residence, personal belongings, and retirement accounts. After your debts are paid off or discharged, your bankruptcy will be closed and you can start fresh.
While bankruptcy can provide relief from overwhelming debt, it can also have long-term consequences on your credit score and ability to obtain credit in the future. It's important to weigh the benefits and challenges before deciding if bankruptcy is the right choice for you.
If you're looking for more information on debt relief options, try our free Debt Relief Calculator. This tool can help you understand which options may work best for your specific situation.
What Happens When You File Bankruptcy?
Declaring bankruptcy means asking the court to eliminate debts that you cannot pay. The type of bankruptcy you file and the debts you owe can affect which debts you can discharge. However, by filing for bankruptcy, you can eliminate most unsecured debts and start fresh to recover from your financial crisis.
Here are five things that happen when you declare bankruptcy:
1. Determine Whether To Hire An Attorney
Fortunately, if you're considering filing for bankruptcy, most bankruptcy attorneys offer a free consultation to help you decide if they're the right fit for you. However, it's important to understand the implications of filing for bankruptcy without an attorney.
When we began writing articles, we received many requests to connect people with trustworthy bankruptcy attorneys since online reviews can be biased. To address this issue, we developed the "5 R's criteria" to recommend bankruptcy attorneys:
One of the key factors we consider is the rate that attorneys charge. While bankruptcy attorneys offer free consultations, they are still running a business and do not typically provide their services for free.
So, what is the cost of filing for bankruptcy? This is a common question, and we've gone through thousands of data points to create an attorney fee estimate calculator based on your zip code. You can find the calculator down below.
2. Determine Which Chapter to File
If you're considering filing for bankruptcy, you may have heard of Chapter 7 and Chapter 13. These are the most common types of consumer bankruptcies. However, each type has its own set of pros and cons. So, which one is better for you?
It can be a difficult decision, considering all the factors involved. But don't worry, we've got you covered. We've built a free calculator that is based on the bankruptcy forms to help you decide between Chapter 7 and Chapter 13. Understanding the benefits and consequences of each type of bankruptcy can help you make the right choice for your specific situation.
3. Bankruptcy Automatic Stay
When you file for bankruptcy, the Bankruptcy Code provides an automatic stay that goes into effect immediately. This stay prevents creditors from collecting any debts you owe them until the stay is lifted or your bankruptcy case closes. However, there are some situations where the stay may not go into effect automatically, such as if you have filed for bankruptcy multiple times before or if you have had previous bankruptcy cases dismissed. In those cases, you may need to petition the court to request protection from the bankruptcy stay.
The bankruptcy stay is a powerful tool that protects you from further debt collection by creditors. It gives you the time you need to reorganize your debts through Chapter 13 bankruptcy or seek relief through Chapter 7 bankruptcy. The Bankruptcy Code prohibits creditors from taking any action to collect a debt from you without prior approval from a bankruptcy judge.
4. You Must Complete Your Debtor Education Course
Before receiving their bankruptcy discharge, debtors are required to complete two courses. The first course is a credit counseling course that must be completed before declaring bankruptcy. The second course is a debtor education course, which must be taken after filing the bankruptcy petition.
The deadline for completing the debtor education course and filing a certificate of completion varies depending on the chapter of bankruptcy filed. It is recommended to complete the course and file the certificate of completion before the First Meeting of Creditors to avoid forgetting about this requirement. Failure to complete the course or file a certificate of completion will result in not receiving a bankruptcy discharge.
If you're considering bankruptcy, it's essential to understand the importance of these courses. The credit counseling course helps you understand your financial situation and explore alternatives to bankruptcy. The debtor education course teaches you how to manage your finances better and avoid future financial problems. Completing both courses can help you make a fresh start and avoid making the same mistakes in the future.
5. Attend the First Meeting of Creditors
If you're filing for bankruptcy, you'll need to attend a meeting called the "First Meeting of Creditors" or 341 Meeting. The bankruptcy court will schedule this meeting for you after you file your bankruptcy petition, and it typically takes place a few weeks later. During the meeting, a bankruptcy trustee (not a judge) will ask you questions under oath about your finances and bankruptcy case. Although the name suggests otherwise, creditors usually do not attend this meeting.
Attending the First Meeting of Creditors is mandatory for all debtors in bankruptcy. It's an opportunity for the trustee to gather information about your assets, debts, and financial situation. The trustee may also ask about your plans for repaying creditors or selling assets. While it may seem intimidating, the meeting is generally straightforward and usually only lasts around 10-15 minutes.
6. Propose a Chapter 13 Repayment Plan (if you pursue Chapter 13)
When you file for Chapter 13 bankruptcy, you must also submit a proposed repayment plan. This plan outlines how you plan to reorganize your debts during bankruptcy. All interested parties, including the Chapter 13 trustee and creditors, receive a copy of the plan.
A bankruptcy judge will hold a confirmation hearing to either approve or deny the proposed plan. If any party objects to the plan, such as the trustee, court, or a creditor, your bankruptcy attorney can usually amend the plan to address the objection.
7. Receive Your Bankruptcy Discharge
If you meet the requirements and fulfill everything mandated by the Bankruptcy Code, the court will grant you a bankruptcy discharge before closing your bankruptcy case. This discharge frees you from any legal responsibility to repay the debts that were discharged through your bankruptcy case.
Both Chapter 7 and Chapter 13 allow for the discharge of most unsecured debts. This includes:
- Credit card debts
- Medical bills
- Old rent or lease payments
- Most old income tax debts
- Some student loan debts
- Old utility payments
- Most personal loans and judgments
To determine which of your debts are eligible for discharge in bankruptcy, it is best to seek guidance from an experienced bankruptcy lawyer.
Should you file bankruptcy?
If you're struggling with a mountain of debt, filing for bankruptcy might seem like the way out. However, it's important to know that there are other options available to you as well. In some cases, an alternative to bankruptcy might be a better way to eliminate your debts. But don't worry, we are here to help! If you're looking for guidance on your debt-relief options, we can help you understand what's available to you. Simply get in touch with us and we'll be happy to assist you.