What Happens After Filing for Bankruptcy?

If you’re overwhelmed by debt, bankruptcy may seem like a great solution. Get rid of the debt, the letters, calls and threats from collection agencies, the sleepless nights, and start with a clean slate.

Bankruptcy IS a great way to start with a clean slate, it can have a major impact on your life going forward.

On the other hand…

Whether you file for Chapter 7 or Chapter 13, your financial life will be dramatically changed, and not all in a good way.

Expect major hits to your credit score, tough going when it comes to getting loans – including for things like buying a home or car – and it could impact renting an apartment or maybe even getting a job. The bottom line is that if it’s all going to work, you probably need to make a major change in lifestyle.

If you file Chapter 13 bankruptcy, you keep your house and car, even if you owe money on them, and they become part of your repayment plan.

If you file Chapter 7 bankruptcy, it may surprise you to know that while Chapter 7 requires you to sell property that isn’t exempt (more on that later) to pay off your debts, many people are able to retain most or all of their assets. A 2018 survey by the American Bankruptcy Institute found that, of those who file their exemption paperwork properly, 93% keep their property.

But, of course, you have to do things right. So, let’s take a look at some of those things.

What Does Bankruptcy Do?

Bankruptcy is a legal way for people who are deeply in debt to get back on their feet. It’s handled by a court. A judge and court trustee review the assets of the person who is filing, as well as what they owe and to whom. The court decides whether to discharge the debts, which means the person who has filed bankruptcy is no longer legally required to pay them.

There are different types of bankruptcy depending on the financial situation of the person who is filing. Chapter 7 is the most common for individuals (as opposed to businesses) filling bankruptcy, followed by Chapter 13. Individuals can also file Chapter 11, but it is rare (only 1.5% of cases) and costly.

You don’t necessarily get to decide which type you’ll file for. When a person files for Chapter 7, they’re subject to the U.S. Bankruptcy Court’s Chapter 7 means test. The test determines whether the person filing actually may be able to repay some of their debt. If a person has enough income that the judge believes they can pay down debt under a repayment plan, the judge may not approve the Chapter 7 filing. In that case, the person may file for Chapter 13.

This explanation, by the way, is simplified. Bankruptcy is complicated with a lot of ins and outs, and its best to get advice from a bankruptcy lawyer or credit counselor before taking the plunge.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often called “liquidation bankruptcy,” though most people actually get to keep their stuff. Of the more than 507,000 bankruptcy petitions filed by individuals in 2020, 70% were Chapter 7 filings. Of those, most filing cited “consumer debt” as the majority of their debt. This is debt built up by buying things, much of it with credit cards.

Assets that aren’t exempt are liquidated – sold off – to pay the debt. The person who filed keeps property considered “exempt,” which likely would include your house if you own one, the car you use for work, equipment you use at work, Social Security checks, pensions, veteran’s benefits, welfare and retirement savings. Nonexempt assets are “luxury” items like cash, bank accounts, stock investments, coin or stamp collections, a second car or second home, a snowmobile, boat or ATV, etc. The money raised from the liquidated items is used to pay the trustee, cover administrative fees and repay your creditors as much as possible.

Chapter 13 Bankruptcy

With Chapter 13 bankruptcy your assets aren’t sold off. Rather, the court, your trustee, you and your creditors work out a payment plan based on your income and assets. The minimum payoff time is three years, and the maximum is five years. The focus is protecting secured debt. You can keep your house in Chapter 13 and your car will also likely be protected. Unsecured debt is paid off based on assets and income.

Chapter 13 is for people who have a regular income and don’t exceed a certain debt amount. The cap is set periodically, and a bankruptcy lawyer will help you determine if you qualify. Once you successfully complete – or discharge – the payment plan, the rest of your unsecured debt is forgiven.

If you have trouble sticking to the plan, it’s possible to return to the court to ask for modifications if your circumstances change, and many people do. Still, more than half of the people who file for Chapter 13 bankruptcy don’t make it to the end, most because they can’t make the payments. In this case, they can file for Chapter 7. Those who don’t end up in the same situation they were before filing – creditors can again pursue repayment of the debt.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is predominantly for businesses. Only 1.5% of individuals with consumer debt who filed for bankruptcy in 2020 filed Chapter 11. It allows businesses to reorganize their finances and stay open, so they can make money to pay back creditors. Though the business continues to operate during bankruptcy proceedings, most of the decisions are made with permission from the courts.

Your Credit Score

If you’re filing bankruptcy, you likely don’t have a great credit score or credit report. In the short term, bankruptcy won’t change that.

If you do a good job of managing your finances following bankruptcy, and, in the case of Chapter 13, stick to the repayment plan until discharge, your credit score eventually will improve.

Chapter 7 bankruptcy remains on your credit report for 10 years, and Chapter 13 is on your credit report for seven years.

One of the biggest boosters to a credit score is paying bills on time, as well as not over-extending use of credit. So, if you stick to a smart financial plan after filing bankruptcy, the damage to your credit score and credit report won’t be forever.

Bankruptcy, Trustees & Protection from Creditors

Two things happen immediately once you file for bankruptcy: you’re assigned a trustee, and actions by creditors against you immediately (though temporarily in some cases) stop.

The Bankruptcy Trustee

Trustees are usually bankruptcy lawyers, and they oversee the liquidation of your non-exempt assets if you filed Chapter 7. They also oversee the meeting of creditors, and they recommend to the court how creditors will be paid back.

With a Chapter 13 bankruptcy, the trustee oversees the payment plan and makes sure it’s being followed.

Trustees make sure the proceedings are going according to law and there’s no fraud involved. They also collect a fee, usually a percentage of what’s paid to creditors.

If you disagree with your trustee, you can go to the judge, who makes the final decisions.

The Automatic Stay

One positive thing about filing for bankruptcy is it immediately protects you from creditors. This is called an “automatic stay.” Calls and letters from creditors or collection agencies, as well as lawsuits and wage garnishments, are stopped by a bankruptcy filing. The automatic stay will halt foreclosures and evictions, and keep your utilities from being turned off.

It won’t keep your ex-spouse from collecting child support, and you still have to pay taxes.

You have the right to sue a creditor who violates an automatic stay. On the other hand, creditors may also ask the judge to lift the stay so they can repossess your car or foreclose on your house. Since the bankruptcy proceeding is a way for the judge to decide what will be done about your debt, the creditor has to make a compelling case for the stay to be lifted.

If you file for bankruptcy twice in the same year, the second time around the automatic stay is only in effect for 30 days.  In that case, you or your trustee can petition the court to keep the stay. You have to show your second bankruptcy was filed in good faith.

Paying Your Filing Fees

When you file for bankruptcy, you have to pay a bankruptcy fee. The court is pretty strict about it. While it varies by state, it’s usually around $300 and you’re expected to pay it immediately. The judge may allow you to pay it in installments if you can’t come up with the money right away. The judge will give you an installment schedule spread over 120 days to pay it, and your bankruptcy proceedings don’t start until the fee is paid. If you don’t make the payments on time, the bankruptcy is dismissed.

Meeting of Creditors

The meeting of creditors, also known as a 341 hearing, may sound daunting, but it’s usually just a meeting between you and the trustee. Your creditors are invited, but they don’t usually attend. The daunting part is actually the preparation involved. You’ll be asked by the trustee to provide in advance your tax returns, pay history (usually check stubs), Social Security card, a photo ID and more. All the documents the trustee asks for are vital to the process, and the faster you provide them, the more smoothly things will go.

The meeting involves the two of you going over the paperwork and figuring out if you’re eligible to file for Chapter 7. If everything is in order, the trustee sends the information to your creditors.

Debtor Education

The bankruptcy court is very invested in making sure that filing for bankruptcy doesn’t become a “get out of debt free” card that you make a habit of using. Before you file, you’re required to take a credit counseling course. Then, after the meeting of creditors, you have 60 days to take a debtor education class. They are administered by legitimate agencies certified by the U.S. Trustee Program, which is part of the Department of Justice. The two courses have different purposes.

The credit counseling course helps you determine if you need to file for bankruptcy, or can pay through a repayment plan, like those offered by nonprofit debt management agencies. A counselor goes over your income, debts and living costs and helps you assess the situation.

The debtor education course is for people who couldn’t pay down debt through such a plan, but had to file bankruptcy. The class focuses on how to make good financial decisions and avoid filing a second bankruptcy. The course will help you put together a budget, and teach how to use credit responsibly, have a strategy for dealing with financial emergencies, and more.

The clock on the 60 days to take the course starts ticking after the creditor meeting ends and, again, the course is required. If you don’t take it, your bankruptcy is dismissed.

Effects on Property

If you file Chapter 13 bankruptcy and follow the repayment plan, and keep making your house and car payments, you keep your property.

If you file Chapter 7, and still have secured debt – debt tied to property like a house or car – you have to fill out a statement of intention as part of the filing. The form lets the court know what you plan to do with your secured debt. If you can’t afford the payments, you can surrender the property to repay debt. This means you no longer owe any money on it, but you also lose the property. You can also “reaffirm” the debt, which means you’ll work with the creditor on how to pay it off, and you will keep it. With a car, you can also pay it off with a “motion to redeem,” which means you pay what you owe on it or the current market value, whichever is lower, and keep the car.

Current & Future Employment

Bankruptcy filings are public information, and there are certain ways people who know you, including a potential employer or your current one, may find out you’ve filed.

All court records, including bankruptcies, are available for a small fee through the Public Access to Court Electronic Records (PACER). This system is used mostly by people who want to have access to court records – lawyers, journalists and, yes, creditors.

Newspapers used to print court news, including local bankruptcy filings, but generally don’t anymore. Newspapers still print court-related public notices, also known as legal notices, usually in the classified ad section of the paper. These are notices that are required by law to be published and generally don’t include bankruptcy filings.

The most likely place an employer will see your bankruptcy is on your credit report.

Employers are increasingly screening potential employees, according to HR.com. The rate has risen every year recently and by 2020 was up to 94% of employers. Of those, 38% said they check the credit report of some potential employees, and 14% said they check all potential employees’ credit reports. While it’s less likely an employer checks credit reports of current employees, 16% said they do.

Businesses check credit reports, they said, to protect the business and customers from embezzlement or theft, and it’s also a way to verify background details. The good news is, you employer, or potential employer, can’t look at your credit report without your written consent.

Speak with a Credit Counselor

If you’re in enough debt that you’re considering the extreme step of filing bankruptcy, the first thing you should do is speak to a credit counselor. Credit counseling, which is available free through nonprofit accredited debt management agencies, can be a good way for a nonjudgmental person who understands the ins and outs of personal finances, to help you fully assess what your situation is. Credit counseling can also help if you need financial advice after a bankruptcy.

Nonprofit accredited debt management agencies can be found through the NFCC. The counselor may recommend a debt management plan, in which they negotiate lower interest rates with creditors, usually credit card companies. You would pay one monthly payment to the debt management agency over three to five years, and the agency pays your creditors. Unlike bankruptcy, this doesn’t appear on your credit report, and is a less catastrophic way to pay down debt without filing bankruptcy.