What Happens If I Declare Bankruptcy? Know the Next Steps

What happens if you declare bankruptcy depends on a few things, such as the bankruptcy type. Before filing, it’s important to understand the process, what happens next, and what other debt-relief options exist. After all, bankruptcy can be an effective way to get a handle on debt, but it also has long-term repercussions and isn’t right for everyone.

What happens after you file for bankruptcy

Most people file for either a Chapter 7 or a Chapter 13 bankruptcy, depending on the situation and desired result.

With a Chapter 7, 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, as well as your financial situation. Typically, the following things will occur after you file a bankruptcy petition in federal court.

You’ll have to pay some 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 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.

Finally, you’ll have to take two mandatory courses. The first is a credit counseling course, which you take before filing. The second is a personal financial management course, which happens after filing. Each course costs around $50, though it may be possible to take these courses for free with a fee waiver.

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.

Chapter 7 bankruptcy trustee

The purpose of a Chapter 7 bankruptcy trustee, or “panel trustee,” is to liquidate the debtor’s (person who files) assets and use the proceeds to pay back debts. There are two main types of assets in bankruptcy:

• Exempt assets: These aren’t liquidated or sold, typically because the proceeds would be insufficient to pay off any creditors. An example of this is a house with little to no home equity in it.
• Nonexempt assets: These are assets that can be sold to pay as many debts as possible before the court discharges the rest. This includes anything that’s not essential to maintain a basic standard of living.

Besides selling any assets and distributing the proceeds to the debtor’s creditors, the trustee will also:

• Review any paperwork
• Verify the debtor’s identity
• Look for potential fraud
• Perform other administrative duties (ex. set up the 341(a) Meeting of Creditors)

Upon declaring bankruptcy, you’ll also have to pass a Means Test. This test determines whether you could have paid back your debts and if you qualify for a Chapter 7 bankruptcy. It’s commonly used to prevent people with a high income from getting rid of their debts by filing for bankruptcy.

The Means Test evaluates your average income for the six months leading up to declaring bankruptcy based. It also takes into account the state’s median income, your household size, and your monthly expenses. If your income is lower than the median, you should be able to pass the test and qualify to file for a Chapter 7.

If your income is higher, you’ll need to complete the rest of the form to determine your eligibility. Those with a higher income have to include all expenses, such as basic living expenses, to determine their disposable income. The result will determine whether you qualify for a Chapter 7 or a Chapter 13.

Chapter 13 bankruptcy trustee

A Chapter 13 bankruptcy trustee, or “standing trustee,” evaluates the debtor’s financial situation and oversees 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.

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.

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 a Chapter 7, it can last between three and six months. With a 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.

You must attend financial management 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.

The trustee will sell some of your property

Again, a bankruptcy trustee will sell your nonexempt assets or property when you declare bankruptcy. This is particularly true for those who file for a Chapter 7.

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 since this option doesn’t involve selling your assets. Instead, you’ll be required to submit and follow a specific repayment plan designed to pay off your debts within three to five years.

The downside is that you’ll need to pay any non-dischargeable debts in full as part of the plan. This includes things like alimony or child support.

You’ll also have to pay certain nonexempt assets to any creditors. For example, if your home has a lot of equity in it that isn’t covered by an exemption, you may have to repay it.

Bankruptcy court will discharge your debts

After completing either the Chapter 7 or Chapter 13 case, the court will grant you a bankruptcy discharge order. 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 instead. Unsecured debts, meanwhile, are those that don’t have an asset. This includes things like medical debts, credit card debts and even payday loans.

Read more: More than 90% of payday loan borrowers regret their original payday loan.

During a Chapter 7 bankruptcy case, your secured debts may not be safe. For example, your creditors may be able to legally foreclose on your property or repossess a vehicle that’s past due. If, however, you can keep up on payments, you may be able to keep the asset.

With a Chapter 13, you can keep the collateral as long as you keep up with payments. In other words, you won’t have to worry about repossession or foreclosure.

What happens after bankruptcy?

After completing the Chapter 7 or Chapter 13 bankruptcy case, most of your debts will be discharged. This means your creditors will no longer be able to collect from you.

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 debts 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, a Chapter 7 can remain on your report for up to 10 years. A Chapter 13 will show up for up to seven years.

Bankruptcy will also cause a significant drop in credit score, though this depends 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. According to VantageScore, the average person’s credit score after declaring bankruptcy is around 530.

Although there’s no way of knowing exactly how bankruptcy will affect your credit score, there are ways to rebuild it. This includes things like:

• Staying current on bills by paying them on time
• Only borrowing what you need and can reliably repay
• Budgeting your finances each month and cutting back on unnecessary expenses
• Creating long-term financial goals like saving or getting rid of any remaining debts
• Using credit-builder loans

Rebuilding credit after bankruptcy

You aren’t going to have many options to rebuild credit at first. Everyone is eligible to sign up for a program like Experian Boost so that you get credit for paying your standard monthly expenses.

When you become eligible for other reentry-level products, like secured credit cards or credit builder loans, will depend on your particular bankruptcy case. You will not qualify for any new credit at all until your bankruptcy has been discharged. For Chapter 7, that could be six months. And after that, whether or not you’re able to open even secured lines of credit may not be immediate, though you can try.

First, you’ll have to accrue enough available cash to make the initial deposit. The same will hold true for credit-builder loans, where instead of getting the loan proceeds upfront, a lender holds them for you in a savings account until you’ve made all the payments. At the end of the loan term, you collect your money, and it may help you boost your credit score if you’ve made all of your payments on time. You’ll need time, though, to stockpile enough cash to make the required deposit for any kind of secured credit product.

However, for Chapter 13 filings, it could take up to five years before you’ll even be able to apply for any new product. During that five years, your Chapter 13 trustee will disburse all of your money on your behalf. The good news is that you’re usually allowed to keep one credit card while your case is pending to cover you in a financial emergency. The bad news is that during your repayment period, you won’t be able to sign up for any secured loans or credit cards.

With good credit habits, bankruptcy could end up being a fresh start, helping your credit and overall financial health, but it will take time and patience before you can truly buckle down and fix your credit score.

Will you be able to get a car loan or mortgage after bankruptcy?

Since bankruptcy shows up on your credit report for a long time, getting new types of financing can be tricky. It’s possible to get a car loan or a mortgage after filing, 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.

If you need an auto loan, avoid getting one through the dealership since their terms are generally unfavorable. As for a mortgage, here’s the minimum credit score needed to qualify in most cases:

• USDA loan: 640+
• VA loan: None, but 620+ recommended
• FHA loan: 580+
• Conventional loan: 620+

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.

How to file for bankruptcy

Filing for bankruptcy can be lengthy and complicated, but there are some ways to make the process easier.

Talk to a bankruptcy 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.

Set up a budget to pay your attorney fees and other expenses

Even if you file for bankruptcy without an attorney, you’ll still need to pay certain expenses like filing or course fees. Along with this, you’ll need to take some time to learn about bankruptcy law and how to best navigate the process.

Whether you hire an attorney or not, you’ll need to set up a budget to pay for these expenses. Compare different firms in your area and find one that fits into your budget. Remember, the cost of an attorney starts at around $1,500 and can increase from there.

Compile all of your financial records

Prepare all required documents or paperwork before filing for bankruptcy. This includes things like current expenses, debts and liabilities, assets, and income. Doing this in advance will make the process easier for both you and an attorney. You’ll need information from at least the past six months. However, try to gather as many financial statements as possible from the past several years.

Get credit counseling

Credit counseling is required within 180 days before filing for bankruptcy, regardless of type. Until you get it, the court will not accept your bankruptcy petition. This is because the court wants to see that you’ve exhausted all other options first.

Check the U.S. Courts website for their list of approved credit counselors. Many credit counseling agencies offer this service online. Once completed, they’ll provide a certificate you can present to the court. Without this certificate, the court will deny your petition.

File the petition

After preparing all the required bankruptcy forms, you’re ready to file the petition. Make sure every form is printed on single-sided sheets. Make plenty of copies and sign the correct form (never sign the original).

Check with the U.S. Courts website for a list of bankruptcy forms, but also make sure you have any required by your state. Along with this, you should have your credit counseling course certificate, proof of income, and any fee waivers.

At the court, head to the clerk’s office and give them the documents to sort through and scan or upload. Once they do this, they’ll give you a bankruptcy case number, the name of your trustee, and a date to meet the trustee.

Attend your “meeting of creditors”

Your court-appointed trustee should help you navigate the next few steps, one of which is to attend the meeting of creditors. Be prepared to answer any questions the trustee or any creditors ask. Also, bring the following things to the meeting:

• Government ID
• Social security card
• Copies of all bankruptcy forms
• Pay stubs or proof of income
• Bank statements
• Other supporting documentation

What happens if you end up back in debt?

If you end up back in debt after declaring bankruptcy, you’ll have to wait to file again. This depends on the bankruptcy type, but you can expect the following waiting periods:

• Eight years to file a Chapter 7 again after filing a Chapter 7
• Two years to file a Chapter 13 again after filing a Chapter 13
• Four years to file a Chapter 13 after filing a Chapter 7
• Six years to file a Chapter 7 after filing a Chapter 13

Other debt-relief options besides bankruptcy

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.

Debt Management Plan

With a Debt Management Plan, you’ll work with a qualified credit counselor to help pay off your unsecured debts. The credit counselor will work with your creditors and try to negotiate any debts into a simple monthly payment plan. They may also be able to lower your interest rates or waive any late fees. You will have to pay a small agency fee and close any credit cards enrolled in the plan.

Want to learn more about Debt Management Plans? Check out this video:

Debt settlement

With debt settlement, you work with a company that tries to get your creditors or lenders to reduce your original balance. Usually, the company will advise you to stop making payments on any enrolled debts as this will improve your chances of success. You’ll also need to start paying into a secured account until there’s enough money to pay off your debts.

Debt settlement can damage your credit score. But it can also reduce eligible unsecured debts by as much as 50% (after agency fees).

Personal loans

If you have good credit, you can apply for a personal loan with a low interest rate to consolidate other unsecured debts. This could mean reducing your monthly payment. It could also save you hundreds or thousands of dollars in interest.

The bottom line

Bankruptcy is a complicated and, in most cases, lengthy process. Still, knowing what to expect and how to prepare is key to making sure you succeed. Everyone’s financial and personal situation is different, so consult with an attorney and brush up on bankruptcy law before filing. That way, you’ll come out on the other side with the best possible outcome.

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