Many people consider bankruptcy but postpone taking action because they don’t know what’s going to happen. Often, they fear losing everything and don’t want to damage their credit. But bankruptcy is actually a structured, predictable legal process. If you’re struggling with debt and wondering what will happen if you file for bankruptcy, here’s what you need to know.
There are two types of bankruptcy
You have two options for filing, and the choice you make will determine what property you keep and whether your debt will be discharged or paid back. If you file for Chapter 7 bankruptcy, your assets will be liquidated with the exception of non-exempt assets like your house and car. If you file for Chapter 13 bankruptcy, your debts will be restructured into a single monthly payment that you’ll make for between 3-5 years.
Once filed, the stay takes effect immediately
As soon as you file for bankruptcy, a stay is automatically in effect that puts a pause on most collection activity. Collection calls and letters must stop and violations can result in serious penalties. Any pending lawsuits related to dischargeable debts are paused, no matter how far along the case is. Most importantly, attempts to seize funds from bank accounts are blocked and repossession efforts are paused.
For many people, this stay provides significant, immediate relief and makes the rest of the process much easier.
Your case is assigned and reviewed by a trustee
After filing, your case will be assigned to a bankruptcy trustee. This individual is a neutral administrator appointed to review cases. They will examine your petition, schedules, income, expenses, and asset disclosures for accuracy and completeness. Their role is completely procedural, and they don’t judge character or financial decisions.
You’ll attend a meeting with creditors
The “meeting of creditors,” also known as a “341 meeting,” is a brief, formal meeting that typically lasts under 10 minutes. During this meeting, your trustee will ask questions to confirm your identity and verify information. In most cases, creditors don’t attend this meeting. However, you will be placed under oath and you must answer all questions truthfully.
You’ll be required to complete financial education
Bankruptcy law requires you to complete financial education both before and after filing. These courses – including credit counseling – focus on budgeting and financial management, cost around $50, and take no more than a couple of hours to complete. At the end of each course, you’ll be given a certificate of completion.
The discharge order is issued
The discharge order is the legal event that eliminates qualifying debts. While both Chapter 7 and Chapter 13 result in a discharge, how it happens and what it looks like is very different.
Chapter 7 discharges are fast
Most Chapter 7 discharges happen within three to six months of filing. Chapter 7 is for people whose income can’t realistically support repayment. Once the case requirements are satisfied, unsecured debts are wiped out. Eligible debts include credit cards, medical bills, and personal loans. However, student loans, child support, and recent taxes are generally not discharged.
Chapter 13 is a payment plan
A Chapter 13 discharge doesn’t eliminate debts immediately. The court works to restructure the debt into a repayment plan that lasts between 3-5 years. Once the payments are complete, the discharge is issued.
Credit will be impacted but not forever
Although bankruptcy does affect your credit health, it’s not catastrophic. A Chapter 7 will stay on your report for up to 10 years, while a Chapter 13 stays on your report for seven years. Although your credit health will be impacted, it won’t last forever, and you can start rebuilding credit through secured credit cards and other small loans designed for people with bad credit.
Financial recovery begins
After you file and get your debts either discharged or restructured, life resumes with less pressure and more clarity. Eliminating debt payments frees up more income for necessities and savings, and you’ll feel less stressed and anxious overall. Your expenses won’t be distorted by impossible obligations, and you’ll be able to start creating an emergency fund to reduce your future vulnerability.
Without massive debt looming over you, you can start planning your financial future once again and start saving for retirement or take that vacation you’ve been dreaming of.
Bankruptcy is a structured process that eliminates financial stress
What happens after you file for bankruptcy is straightforward and simple. Right away, collection efforts stop and a structured legal process begins. Your debts are discharged or restructured according to the law, and financial recovery isn’t far behind. When you’re struggling to pay down your debt and don’t see any solutions in sight, bankruptcy can bring relief. Although it will impact your credit negatively, filing for bankruptcy isn’t the end of your financial life. It’s the first step toward creating financial stability.
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