People going through financial hardships and debt issues typically consider filing for bankruptcy as a final resort. Filing for bankruptcy is a legal process meant to help individuals or businesses get rid of debt. It also helps people repay a portion of the money they owe.
This debt relief process has long-term effects on your credit because it remains on your credit report for anywhere between 7-10 years. Bankruptcy will also limit your ability to open credit card accounts, as well as affect your ability to secure loan approvals with favorable rates. As such, it is important to understand what declaring bankruptcy means for you or your business.
Filing for bankruptcy can often be a complex and intimidating process but knowing what happens after can help make bankruptcy seem a lot less intimidating.
What Happens Immediately After Filing Bankruptcy
Once you file bankruptcy, a trustee will be assigned to your case to handle your bankruptcy process and oversee the liquidation of assets for Chapter 7 or repayment of debts in Chapter 13 (which we shall get into later in this column).
Next, you will have to attend a ‘Meeting of Creditors.’ The assigned trustee will place you under oath and ask about your assets and debts. Creditors may also attend and question you.
Declaring bankruptcy will trigger an automatic stay to protect you from debt collection harassment from creditors, at least until your bankruptcy case is sorted out. This means that creditors can’t call you to collect on unsecured debts or credit card debts.
When proceedings get finalized and are declared bankrupt, you will receive debt discharge orders. This means that creditors cannot legally collect any outstanding debts. But you will have to take a credit counseling course to help you learn good financial management skills. You can only receive a debt discharge after you complete the course.
The Different Kinds of Bankruptcy Involved
Before filing for bankruptcy, individuals must first meet at least these three requirements;
- You must demonstrate an inability to repay debts.
- Complete credit counseling under a government-approved credit counselor.
- Decide which type of bankruptcy you will file between Chapter 7 and Chapter 13, as highlighted earlier.
Chapter 7 Bankruptcy
Also known as straight bankruptcy, Chapter 7 bankruptcy is the most commonly applied form of bankruptcy. When filing for a Chapter 7, a federal court trustee supervises the sale of non-exempt assets. Items such as furniture, motor vehicles, and work-related tools are usually exempt.
Cash raised from the sale of non-exempt assets settles debts with your creditors. When the bankruptcy gets discharged, the balance of what you owe gets eliminated. You will still have to pay student loans, court-ordered alimony, taxes, and child support, but Chapter 7 bankruptcy can get you out of certain kinds of debts.
Consequences Of Chapter 7 Bankruptcy
- You may lose your property.
- Negative bankruptcy information remains on credit reports for up to ten years after filing.
- You can’t file again for bankruptcy again until after eight years.
Chapter 13 Bankruptcy
Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy allows you to keep your property. In exchange, you partially or completely pay off your debts. With Chapter 13 bankruptcy, a court and attorney negotiate a repayment plan over a 3 to 5 year period.
You may agree to pay all or part of your debts over this period of time. After completion of the agreed payment plan, your debts get discharged. This applies even if you only paid off part of the debt you originally owed.
Chapter 13 bankruptcies remain the most favorable option because individuals get to retain some of their assets after repaying part or all of the debt. Chapter 13 bankruptcy also cycles off your credit report after seven years so that you can file for bankruptcy again within two years.
Will Bankruptcy Dent My Odds of Getting a Job in the Future?
Naturally, you may want to know if filing for bankruptcy will affect your current job or affect your chances of future employment. After all, about a third of hiring employers run a credit check on new job applicants.
If you’re not planning to switch jobs, you don’t need to worry much about bankruptcy ruining your career since employers don’t normally do background checks on hired employees. But if you’re trying to get a new job, then the answer is a straight yes. Declaring bankruptcy could ruin your chances of landing a new opportunity, especially if the job lands somewhere in financial services or government.
Employers do background checks to ensure that you are an ideal hire for their company. They need to know that you’re not financially stressed to minimize the odds of fraud or theft. But if they run a normal criminal background check, your issue of bankruptcy will not show up.
Does Bankruptcy Discharge All Debts?
Although both Chapters 7 & 13 aim to help you put your debts behind you so you can proceed with your life, not all debts are discharged. You can avoid car loans and mortgage payments but will still have to pay child support, alimony, student loans, certain taxes, debts not listed from your bankruptcy filing, or criminal fines.
How Does Bankruptcy Affect Credit Score?
The extent to which bankruptcy affects your credit score depends on your financial situation before filing for bankruptcy. The good news is that there are steps you can take to build up your credit again, such as avoiding borrowing more money than you can pay back, acquiring a new or secured credit card, and paying your bills on time.
In the long run, filing for bankruptcy may, in fact, help your credit more than harm it.
Legal Terms You Need to Familiarize Yourself With if You’re Filing for Bankruptcy
Before filing for bankruptcy, you must meet individually or in a group with a nonprofit budget and credit counseling agency. After filing, you complete a course in personal financial management. The bankruptcy gets discharged when this requirement gets fulfilled.
A lien is any legal action allowing creditors to hold and sell debtors’ real estate properties as security or repayment for a debt.
Liquidation happens when a debtor’s non-exempt property is sold off. Assets get turned into a ‘liquid’ form (cash), which creditors receive as payment.
Some types of property get exempted from sale. Depending on state laws, debtors may retain items such as personal vehicles and equity in primary residences.
Bankruptcies get discharged upon completion of proceedings. If you filed for Chapter 7 bankruptcy, a discharge occurs after assets get sold off and creditors receive payments. If you filed for Chapter 13 bankruptcy, completion of the payment plan qualifies for a discharge.
Unsecured And Secured Debt
With unsecured debts, creditors hold no tangible collateral. With secured debts, reclaimable property acts as collateral for your debt. Creditors can seize this collateral if debtors default on their loans.
Reaffirming The Account
Reaffirmed accounts allow debtors to keep a part of the collateral that would get seized as part of bankruptcy proceedings. This applies to Chapter 7 bankruptcy, where debtors may agree to settle debts that may get discharged during proceedings.
For those filing a Chapter 7 bankruptcy, the Bankruptcy Code requires them to prove that they do not have the means to settle their debts. This requirement prevents abuse of the code. Means tests factor income, unsecured debts, expenses, and assets.
If you fail to pass the means test, the Chapter 7 bankruptcy gets dismissed. It may also get converted into a Chapter 13 bankruptcy.
The person or corporation appointed by the bankruptcy court to act on the creditor’s behalf.
Hire A Bankruptcy Law Firm
Despite what many people may think, bankruptcy is not the end of your financial life. There is life after bankruptcy. But first, you need to work with a bankruptcy law firm that has the required knowledge and understanding of bankruptcy law to take over your case and find the best solution for you.
Bankruptcy attorney Michael Alan Siddons can help you file bankruptcy so you can be free of debt and start afresh towards a more solidified financial future. Give us a call at 610-255-7500, so we can provide you with a free consultation.
Remember, bankruptcy can have long-term effects on credit scores and other public records so, it’s best to seek the sound legal advice of a bankruptcy lawyer to guide you through the process.