What Really Happens When You File for Bankruptcy
Bankruptcy may seem like the end of the world, but many companies that have filed for bankruptcy can continue to carry on their business as usual. A lesser known reality is that people can go through bankruptcy and still remain intact. Since this is poorly understood, let’s take a look at how each type of bankruptcy filing affects your finances differently.
Differences between chapters 7, 13 and 11
Usually, people file for bankruptcy only as a last resort when there is no way to meet their debt obligations. A popular assumption is that bankruptcy is only for people who take on too much credit card debt, and while this may be true, people also file for bankruptcy after a major, unexpected financial hit, such as a lawsuit or unexpected illness. …
Another misconception is to think that bankruptcy wipes out all your debt obligations. This is not true. You will still have to pay, and how you pay depends on whether you are filing for bankruptcy: chapter 7, chapter 13 or chapter 11. There are other types of bankruptcies (for example, chapter 12 is for farmers and fishermen.). but these three are the most common.
In Chapter 7, you may have to liquidate certain assets (such as a car or second home) in order to pay off at least some of the debt. Most of your assets are probably exempt from this requirement, but this depends on your condition, your financial situation, and whether the asset is considered “important”. You must meet certain requirements for the submission of applications for participation in Chapter 7, and perhaps most important of them – the income is below average.
In chapter 13, you agree to pay off your debts over the next three to five years in a payment plan, but you still maintain your assets. The good news is that some of these debts are likely to be paid off. However, you must be eligible, which means that your secured debts (debt secured by collateral such as your house or car) cannot exceed $ 1,184,200 and your unsecured debts cannot exceed $ 394,725.
Chapter 11 Bankruptcy is similar to Chapter 13 in that you keep your assets, but it is usually for business . Companies can also file for Chapter 7 bankruptcy, but asset liquidation can be fatal to a business, so Chapter 11 is usually the more attractive option. However, sometimes people with higher incomes file chapter 11 because they are outside the debt limits set in chapter 13. The bottom line is that you keep your things with chapter 11, but it requires a plan to pay off at least least some of the debt or forgiveness.
What happens when you file
When you file for bankruptcy, you automatically get a grace period that blocks your debt. Such a stay prevents creditors and collection agencies from pursuing debtors in relation to the amounts owed. While the moratorium is in effect, your salary cannot be withheld and creditors cannot take back any secured assets.
Oddly enough, bankruptcy is not free. The registration fee alone is over $ 300 for chapters 7 and 13. And then there are the attorney fees. You can apply without a lawyer, but this is not recommended as bankruptcy laws are difficult to navigate. Chapter 7 attorney fees average about $ 1,500, and chapter 13 fees typically range from $ 2,000 to $ 3,000. As with many cases requiring a lawyer, the more difficult your situation is, the more you will pay.
There are ways to reduce the legal costs of filing for bankruptcy. The nonprofit Upsolve , for example, helps you create bankruptcy filing forms for free if your business is simple. Or your local legal aid society can provide you with inexpensive legal services.
As part of the bankruptcy process, you will also have to take a course or two. The government requires people to get credit advice 180 days before applying, and you also need to take a debtor training course if you want to pay off your debts.
A couple of weeks after filing your application, you will need to attend a “creditors’ meeting,” which basically goes like this: a court hearing between you, your bankruptcy administrator, and any creditors who choose to attend. They will all ask you questions about your financial situation and your decision to file for bankruptcy.
Your assets will be liquidated with Chapter 7
Nolo says that in most cases the debtors mentioned in Chapter 7, do not need to liquidate their property (if it is not a guarantee), because it is generally exempt from tax, or simply not worth it. They explain:
If the property is not very expensive or difficult to sell to the trustee, the trustee may “give up” the property – which means you can keep it even if it is not vacated … Most of the property belongs to the Order of the 7 Debtors either exempt from paying taxes, or practically useless for the purpose of collecting money for creditors. As a result, few debtors are forced to give any property if it is not a collateral for a secured debt …
After a meeting of creditors, your trustee will decide whether to liquidate your belongings. If it is liquidated, it means that you will either have to surrender it or shell out its equivalent cash value in order to pay off your debt.
You get a Chapter 13 payment plan
In Chapter 13, you must follow a plan to pay off your debts, and some of them must be paid in full. These debts are “priority debts” and include child support, child support, tax liabilities, and the wages you owe employees.
Your plan is based on how much you owe and what your income looks like, and will include specific instructions on how much you owe and when you owe it.
What Happens to Your Credit and Your Debt
Your credit score will plummet after filing for bankruptcy. FICO notes that the more accounts are involved in a bankruptcy filing, the more impact you will have on your bottom line. In general, a Chapter 7 bankruptcy will remain on your credit report for 10 years, and a Chapter 13 bankruptcy will remain for seven.
After bankruptcy is all said and done, most of the debts are paid off, but not all. In some cases, student loans can be repaid after bankruptcy, but you must pass a federal hardship test.
Other hard-to-pay debts include:
- Tax debts
- Alimony and alimony
- Divorce-related debts, including property settlement debts
Bankruptcy is usually a hopeless way out of a hopeless situation. But knowing how it works and what to expect can help you better navigate the process.
This post was originally published in 2016 and was updated on October 26, 2020 to add additional relevant information and update links, as well as align content with current Lifehacker style guidelines.