What Does It Mean to Declare Bankruptcy?
Are your bills piling up with no relief in sight? Bankruptcy is a legal option that many people pursue to help get their finances under control.
Learn what it means to file for bankruptcy and what the process is like to determine if it's the right option for you.
Designed to help people with excessive debts, the legal process of bankruptcy allows debtors to either discharge debt or create a reasonable repayment plan. Businesses and individuals are eligible to file for bankruptcy. While it gives you a fresh start financially, it does follow you on your credit report, which can affect future borrowing options.
The U.S. Bankruptcy Code establishes six types of bankruptcy, with Chapters 7 and 13 being most common for individuals and Chapters 7 and 11 being most common for businesses.
- Chapter 7: Also called liquidation, this type of bankruptcy involves selling assets to pay creditors. Unsecured debt that isn't paid with this money is usually forgiven, but things like student loans and taxes aren't forgiven.
- Chapter 9: This option applies to municipalities, like cities and schools, that need a reorganization option that allows them to pay back debts.
- Chapter 11: For businesses, this is a reorganization option that potentially allows the business to still operate. The business creates a plan for repaying creditors while continuing to run the business.
- Chapter 12: This option only applies to family farmers and fishing companies, so they can restructure and avoid liquidation.
- Chapter 13: This reorganization option allows you to repay your debts using a repayment plan that lasts three to five years.
- Chapter 15: Foreign debtors might qualify for bankruptcy under this chapter, which addresses international bankruptcy situations.
If you're not sure which type of bankruptcy to file, a bankruptcy attorney can help you better understand each option. They can assess your situation and recommend the type of bankruptcy that will benefit you the most.
When you file for bankruptcy, you file your petition with the federal court. This initiates the bankruptcy legal proceedings. Filing for bankruptcy involves listing all of your debts, assets, income, expenses and other financial information. You can either file for bankruptcy yourself and represent yourself or hire a bankruptcy attorney to handle the process for you.
What Happens After You File for Bankruptcy?
What happens after you file for bankruptcy depends on the type of bankruptcy you choose. If you choose a liquidation type — particularly Chapter 7 — any assets that will be liquidated are sold, and the money goes to your creditors. Once this happens, the remaining debt is discharged. However, you might still be responsible for some debts, such as certain loans or tax debts. If you choose a reorganization type of bankruptcy, the process involves creating a repayment plan that the court approves. You'll then start repaying the debts based on the schedule established by the court.
The bankruptcy process can vary slightly depending on the type of bankruptcy you choose. The process officially starts when you file the petition in federal bankruptcy court. Prior to filing, you might find a bankruptcy lawyer who will guide you through the process and who files the petition on your behalf. You also need to complete two credit counseling sessions before you can file for bankruptcy.
The basic process involves the following steps:
1. You file the petition.
2. A trustee is assigned. This person evaluates your assets and decides what could be sold to pay off debts.
3. The meeting of creditors takes place. You must attend, and you might be asked questions about your finances, including your assets. Creditors can also appear to challenge the bankruptcy, but this is rare.
4. Assets that are being liquidated are sold. If you're doing a reorganization bankruptcy, a repayment plan is established.
5. Another financial management course is required before the completion of the bankruptcy process.
6. Your debts are discharged if you're filing a liquidation bankruptcy type.
The bankruptcy will remain on your credit report for years, sometimes up to 10 years. It will lower your credit score. The lower credit score hurts your ability to get credit, and the bankruptcy itself can disqualify you from many credit opportunities. It takes time for your credit to recover from a bankruptcy. Some ways to help rebuild include:
- Paying all of your remaining debts, such as loans, on time
- Opening a secured credit line, keeping the balance low and paying it off promptly
- Becoming an authorized user on someone else's credit card
- Getting a cosigner for a loan to help rebuild your credit
- Budgeting wisely to avoid relying on credit cards
While most consumer debt is allowed to be included in a bankruptcy filing, some debts are not dischargeable. This includes child support, student loans, taxes, court fines and fines or penalties you owe to a government agency. If you forget to include a dischargeable debt on your bankruptcy petition, it also won't be discharged. Ensure you fill out the paperwork correctly and include all dischargeable debts to avoid this situation.
If you file for Chapter 7 or 13 bankruptcy, an automatic stay goes into place as soon as you file the petition. This means that all creditors have to stop collection activities, including phone and mail contact for collections activities. They also can't file lawsuits against you to collect outstanding debt. It also pauses foreclosure proceedings and most evictions temporarily. When your case is closed, dismissed or discharged, the stay lifts, and those activities can resume.
The stay applies to almost all collections. However, it doesn’t apply to debts related to child support, and it won’t impact any criminal cases.
The length of the bankruptcy process varies based on the type you file. Chapter 7 bankruptcy can take four to six months. A Chapter 13 bankruptcy takes about 95 days to get the repayment plan approved, but the repayment process can take three to five years.
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