What happens if you declare bankruptcy depends on a few things, including the type of bankruptcy you’re filing. Before filing, it’s important to understand the process, what happens next, and other debt-relief options. After all, bankruptcy can be an effective way to handle debt, but it also has long-term repercussions and isn’t right for everyone.
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What happens after you file for bankruptcy
Most people file for either Chapter 7 or a Chapter 13 bankruptcy, depending on their financial situation.
Chapter 7 is known as liquidation bankruptcy. During the process, a court trustee will help liquidate your assets to pay off your debts. After this happens, the court will discharge (eliminate) most of your remaining debts. Also sometimes called a liquidation bankruptcy, Chapter 7 is usually easier and faster than a Chapter 13.
With a Chapter 13, you’ll need to set up a repayment plan with your creditors that lasts three to five years. During this time, you’ll pay back as many of your debts as possible. At the end of the plan, any eligible debts will be discharged. The court will appoint a trustee to help oversee repayments. Chapter 13 is also sometimes referred to as a “wage-earner’s plan” because it helps people with a regular income to consolidate their debts.
What happens after filing for bankruptcy, including what happens to your house, depends on which option you choose and your financial situation. Typically, the following things will occur after you file a bankruptcy petition in federal court.
An automatic stay will go into effect
After declaring bankruptcy, the court will put an “automatic stay” into effect. This court order prevents creditors or debt collectors from harassing you during the bankruptcy proceedings. It also keeps them from pursuing late payments on unsecured debts like medical bills or credit cards. And it protects you from creditor lawsuits and wage garnishment.
An automatic stay usually lasts until the bankruptcy case is closed. With Chapter 7, it can last between three and six months. With Chapter 13, it can last between three and five years, based on the repayment plan.
A creditor can file a “motion for relief” to lift the automatic stay. This usually only happens if they’re currently trying to repossess the debtor’s vehicle or foreclose on their property. In either case, the court may allow them to do this.
A bankruptcy trustee is assigned to your case
After declaring bankruptcy, the court will assign you a bankruptcy trustee to handle your case. The trustee’s duties depend on the bankruptcy type.
In Chapter 7, the majority of your assets will be sold to pay your creditors. The trustee will assess which assets are exempted from sale, and will facilitate the sale of your remaining non-exempt assets and will use that money to pay your creditors.
Chapter 13 bankruptcy involves a repayment plan. The trustee will evaluate your financial situation and oversee the repayment of debts. As the debtor makes payments, the trustee will distribute the money to the creditors in the plan. The trustee will also organize the Meeting of Creditors and perform other basic administrative tasks.
You will have to attend a “meeting of creditors”
The Meeting of Creditors, or 341 creditors meeting, is a mandatory part of declaring bankruptcy. The bankruptcy trustee is responsible for setting it up on your behalf 21 to 50 days after you file.
You will need to bring:
- Government ID
- Social Security card
- Copies of all bankruptcy forms
- Pay stubs or proof of income
- Bank statements
- Other supporting documentation
During this meeting, you’ll need to answer the trustee’s questions honestly and accurately about your financial situation, assets, and debts or liabilities while under oath. Most of the time, this meeting is between you and the trustee. However, creditors can also attend and ask questions.
You’ll have to pay fees
Although there are ways to reduce the cost of bankruptcy, some fees are inescapable.
A Chapter 7 bankruptcy costs around $338, not including attorney fees. When you file, you’ll need to pay a filing fee with either a cashier’s check or money order. If your household income is less than 150% of the federal poverty line, it may be possible to waive this fee. Otherwise, the court may allow you to pay it over four installments.
The filing fee for a Chapter 13 bankruptcy is around $313. Since a Chapter 13 requires a repayment plan, there is no way to waive the fee. If you’re unable to pay it, you might not qualify for this option.
While it’s not mandatory to hire a bankruptcy attorney, doing so can increase your success rate. The cost of hiring one depends on the bankruptcy type, the complexity of the case, and the state. It usually starts at around $1,500.
There will be fees for two mandatory personal finance courses you must complete. Each will cost $50, though you could try for a fee waiver. There are also miscellaneous fees to consider, such as document reproduction, printing and mailing fees, parking fees, and so forth. Since you’ll have to file in person, factor in things like travel time, gas, and missed hours at work.
You must attend two financial education courses
When declaring bankruptcy, you’ll need to take two courses.
The first is a pre-filing bankruptcy credit course (aka credit counseling course, budget briefing course, or pre-petition counseling session). It needs to be completed before filing. Once you’ve taken it, you’ll receive a certificate you can present with your other documents.
The second course is a pre-discharge debtor education course or a personal financial management course. It happens after you declare bankruptcy and receive a bankruptcy ID number. Its purpose is to help you manage your finances better in the future so you don’t file for bankruptcy again. You’ll need to take this course before the court discharges any remaining debts.
Each of these courses will cost about $50.
Your bank account may be closed
Some banks may freeze your accounts when notified of your bankruptcy. This is particularly true if the bank if you have debts through your bank, including credit cards and personal loans. If this happens, contact your attorney or bankruptcy trustee. Depending on the type of assets in your account, they may be able to get the freeze lifted.
In general, you should be able to keep your bank account open. Under Chapter 7, some of your savings should be exempt, and since Chapter 13 is a repayment plan, you’ll need to be able to deposit and access money to be able to make your monthly payments.
The trustee will sell some of your property
During the bankruptcy process, your trustee will determine what needs to be done with your assets.
Chapter 7 bankruptcy
When you file for a Chapter 7, the trustee will assess your nonexempt assets and decide which ones are subject to liquidation to pay off your debts. Assets that can be sold include:
- Second or vacation home
- Luxury goods
- Nonessential vehicle (ex. second or third car)
- Valuable collections (ex. stamps)
- Investments like stocks and bonds
- Money in savings or checking accounts
Some assets are exempt, meaning they can’t be sold. Common examples of this include:
- Primary place of residence
- Vehicle needed for work or school
- Investments in retirement accounts
- Household items
- Clothing (except for luxury goods)
Depending on the situation, you may be able to get a homestead exemption to protect your home equity. If the exemption covers enough of the equity, the trustee won’t sell your home. However, you may have to pay back any amount not covered by the exemption.
Chapter 13 bankruptcy
Those with a lot of assets typically file a Chapter 13 bankruptcy. These assets won’t be sold. Instead, you must submit and follow a specific payment plan designed to pay off your debts within three to five years.
You’ll need to pay any non-dischargeable debts in full as part of the plan. This includes expenses like alimony or child support.
Your trustee will set up and administer the plan. That means you will submit monthly payments to your trustee, who will then pay your creditors.
You’ll also have to pay creditors for certain non-exempt assets. For example, if your home has a lot of equity not covered by an exemption, you may have to repay it.
The court will discharge your debts
The court will grant you a bankruptcy discharge order after completing either the Chapter 7 or Chapter 13 process. This order indicates that any qualifying debts have been discharged or eliminated. It also stops any creditors from taking action against you in the future.
What happens to secured debts?
Secured debts are those that have an asset (aka collateral) tied to them, like a car or home. If you fail to make payments, the creditor can legally take the asset. Unsecured debts, meanwhile, are those that don’t have an asset. This includes things like medical debts, credit card debts and even payday loans.
During a Chapter 7 bankruptcy case, your secured debts may not be protected. For example, your creditors may be able to legally foreclose on your property or repossess a vehicle that’s past due. If you can keep up on payments, you may be able to keep the asset.
With Chapter 13, you can keep the collateral if you keep up with payments. In other words, you won’t have to worry about repossession or foreclosure.
READ MORE: Secured vs. unsecured debt
Will you be debt-free after bankruptcy?
Not necessarily. Even though most of your debts will be discharged, some will remain. The specifics depend on the case and the bankruptcy type. Additionally, the following types of debt cannot be removed with bankruptcy:
- Federal tax debts
- Child support or alimony
- Student loans
- Specific criminal fines
If much of your debt falls into these categories, debt consolidation might be better.
How does bankruptcy affect your credit score?
Declaring bankruptcy affects your credit score in several ways.
For one thing, Chapter 7 can remain on your report for up to 10 years. Chapter 13 will show up for up to seven years.
Bankruptcy will also cause a significant drop in credit score, though exactly how much your score falls will depend on the specific case and your score before filing. Many people see at least a 150-point drop after bankruptcy. However, if your credit score was already low, the impact can be much lower — in extreme cases, some people may actually see their credit score improve after filing bankruptcy.
Pro tip: According to VantageScore, the average person’s credit score after declaring bankruptcy is around 530.
Will you be able to buy a house or car after bankruptcy?
Since bankruptcy shows up on your credit report for a long time, getting new types of financing can be tricky.
Auto loans
Getting a car loan or a mortgage after filing is possible, but there are some things to consider first.
First, lenders consider an applicant’s creditworthiness when deciding whether to lend to them. So, the first step is to start rebuilding your credit score. The better your score and the more time that’s passed since filing for bankruptcy, the better your approval odds. Not only that, but a better credit score means better rates and terms for any loans you might get. If you have poor credit, expect to pay more in interest or have less than ideal terms. Though there are a few options for personal loans after bankruptcy, they will be very expensive.
Home loans
As for a mortgage, some mortgage lenders won’t work with borrowers with bankruptcy or other negative marks on their credit reports. Others will require a much higher down payment before offering a loan.
Here are the minimum credit scores required to qualify for home loans in most cases:
- USDA loan: 640+
- VA loan: None, but 620+ recommended
- FHA loan: 580+
- Conventional loan: 620+
Insolvency vs. bankruptcy
Insolvency and bankruptcy are not the same.
Insolvency refers to a person in a financially distressing situation that makes them unable to pay their debts. It doesn’t mean the person is currently bankrupt. However, an insolvent individual can file for bankruptcy. Before that happens, an insolvent person will usually try to negotiate with their creditors or devise a payment plan before declaring bankruptcy.
An individual can be insolvent but not bankrupt. However, a bankrupt individual is also considered insolvent.
Talk to an attorney
Always consult a bankruptcy lawyer before filing for bankruptcy. Many law firms offer a free consultation and can inform you about the bankruptcy laws in your state. Bankruptcy code and proceedings are often complicated, so having an expert in your corner can help keep you on track.
An attorney can also advise you on whether bankruptcy is the best course of action. If you choose to hire one, they can represent you during the case and help you get the most exemptions. They can also potentially minimize the long-term impact of filing.
The American Bar Association is a good starting point if you’re looking for a bankruptcy lawyer, or Upsolve.org also offers a list of bankruptcy attorneys in your area.
More debt-relief options
Before filing for bankruptcy, consider one of these other options for debt relief. They can help if you either don’t qualify for bankruptcy or don’t want to go this route.
Pro tip: If you want to try other alternatives before filing for bankruptcy, contact DebtHammer for a free consultation. Our team of experts will review your situation to determine your next best steps.
The bottom line
Bankruptcy is a complicated and, in most cases, lengthy process, but it can give you the fresh start you need. Knowing how the process works and what comes next will give you a better shot at success. However, bankruptcy is different for everyone, so consult with an attorney and brush up on bankruptcy law before filing.
