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What Happens After You File Bankruptcy?

Patrick Austin, J.D. | September 26, 2024

Patrick Austin
Attorney from George Mason
Patrick Austin, JD

Patrick Austin is a licensed attorney with a background in data privacy and information security law. Patrick received his law degree at George Mason University's Antonin Scalia Law School, where he served as the Editor-in-Chief for the National Security Law Journal.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: After filing bankruptcy, an automatic stay halts debt collection, a trustee reviews your case, and eligible debts are discharged, but your credit takes a hit.

If you are considering filing for bankruptcy, an important question may be in your mind - after you file bankruptcy what happens? You should probably know the answer to this question before you move forward with the bankruptcy process. Why? Because filing for bankruptcy can have serious consequences such as the sale of personal assets, a drop in your credit score, and the continued obligation to repay non-dischargeable debts.

Below, we break down what happens after you file bankruptcy and take a close look at the short-term and long-term effects that bankruptcy has on your finances and credit score.

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Decide which type of bankruptcy is right for you

If you decide to proceed with personal bankruptcy, you will need to decide which bankruptcy chapter to file under: Chapter 7 or Chapter 13.

Each bankruptcy chapter will differ in what happens to your assets and how your debts are discharged. For example, Chapter 7 bankruptcy basically liquidates your assets to pay your creditors. Any remaining, nonexempt assets will be sold off by a trustee appointed by the bankruptcy court. Your creditors would receive the proceeds from the sale. Once the sale is complete, your outstanding debts will be discharged and you will no longer be under any obligation to repay them. However, note that certain types of debt cannot be discharged through bankruptcy, such as student loans, child support, and taxes.

In addition to Chapter 7, individuals may opt to file for Chapter 13 bankruptcy. Chapter 13 allows you to retain your assets, but you must agree to a multi-year repayment plan. Generally, Chapter 13 repayment plans entail making payments between a three and five year period. The trustee will be responsible for collecting your payments and distributing them to your creditors.

Learn more about the difference between Chapter 7 and Chapter 13 bankruptcy here: Chapter 7 vs Chapter 13 Bankruptcy.

What happens after you file for bankruptcy?

The following actions typically take place after you file for bankruptcy:

  • A trustee is assigned to your bankruptcy case: The assigned trustee will be tasked with administering your bankruptcy filing. In a Chapter 7 bankruptcy, the trustee will be responsible for overseeing the liquidation of assets. In a Chapter 13 filing, the trustee will be responsible for overseeing the repayment of your debts.
  • You will attend a meeting with your creditors: Once a trustee is assigned to your case, they will schedule a meeting that you must attend with your creditors. This meeting is also known as a “341 creditors meeting.” During the meeting, the trustee will ask you, under oath, about your assets and liabilities. Your creditors will also have the ability to ask you questions.
  • An automatic stay will be entered to halt debt collection: Once you file for bankruptcy, an automatic stay will be entered by the court. The automatic stay will ensure that debt collectors stop contacting you to try to collect while your bankruptcy case is pending. An automatic stay also halts the garnishment of your wages.
  • You should attend financial management courses: After filing for bankruptcy, you will need to take financial management courses intended to help you after your debts are discharged. It is important to take these courses seriously since a bankruptcy judge will not sign off on your debt discharge unless and until you complete these courses.
  • The trustee may sell some of your assets: If you filed for Chapter 7 bankruptcy, the trustee may liquidate some of your non-exempt assets and distribute them to your creditors. However, it is important to note that you will get to retain a number of your assets including your automobile, clothing, and certain household items.
  • Many of Your Debts will be Erased by Bankruptcy Discharge or You May Begin a Repayment Plan: In both Chapter 7 and Chapter 13 bankruptcy cases, you will ultimately receive a discharge order from the bankruptcy court. This order effectively stops creditors from taking any collection actions against you going forward. With a Chapter 13 bankruptcy, you will need to follow your repayment plan and pay off your debts within the specified time to secure debt relief.

What happens to your credit after you file bankruptcy?

Both Chapter 7 and Chapter 13 bankruptcy proceedings will berecorded on your credit report and will likely result in a significant drop in your credit score. Nevertheless, the hit to your credit will not last forever.

The amount of time bankruptcy proceedings will remain on your report depends on which type of bankruptcy you file. For example, a Chapter 7 bankruptcy will typically remain on your credit report for 10 years after the filing date. In contrast, Chapter 13 bankruptcy filings will stay on your credit report for seven years if you complete the debt repayment plan or 10 years if you fail to meet the requisite payments.

What happens after you file Chapter 7 Bankruptcy?

After you file your Chapter 7 bankruptcy petition, the following will typically happen:

  • You will be shielded from creditors and debt collectors via the issuance of an automatic stay. This means debt collectors cannot call you, sue you, or pursue wage garnishment.
  • The bankruptcy court will assign a trustee to oversee your case, review your bankruptcy forms, and conduct the 341 creditors meeting.
  • You will need to take a series of financial management courses.

These are some of the immediate effects of filing bankruptcy. Below, we examine what happens after you file bankruptcy with a long term perspective.

Most of your debt is discharged after filing bankruptcy

After you file for bankruptcy, you are no longer responsible for paying back certain types of debts. But the discharge of debts varies depending on the type of bankruptcy you file. Let’s take a closer look.

Chapter 7 bankruptcy wipes out most unsecured debts, including:

  • Credit card balances
  • Medical bills
  • Personal loans

Secured debts, like mortgages and car loans, remain unless you surrender the property. Certain obligations, such as student loans, child support, and recent tax debts, typically survive the discharge.

Chapter 13 bankruptcy offers a different approach by restructuring debts into a manageable repayment plan over three to five years. Debts like credit card balances and medical bills may be partially discharged after completing the repayment plan. Secured debts can be adjusted, allowing you to catch up on missed payments. Priority debts, including child support and alimony, must be paid in full during the plan.

Discharged debts no longer legally bind you, providing a fresh start. This relief contrasts sharply with the immediate credit score impact, setting the stage for rebuilding financial health.

Filing bankruptcy impacts your credit

Filing for bankruptcy significantly impacts your credit score. Chapter 7 bankruptcy can lower your score by 200 points or more and stays on your credit report for ten years. Chapter 13 bankruptcy, which involves a repayment plan, typically reduces your score by 100-150 points and remains for seven years. Both types of bankruptcy make obtaining new credit challenging, but the impact lessens over time as you rebuild your financial health.

Rebuild your credit score after bankruptcy

Here are some of the most effective ways you can rebuild your credit after bankruptcy:

  • Securing a credit card can jumpstart the rebuilding process after bankruptcy.
  • Timely payments on this card demonstrate financial responsibility, gradually improving your credit score.
  • Regularly monitoring your credit report ensures inaccuracies don't hinder your progress.
  • Diversifying credit types, such as adding a small installment loan, also helps.
  • Consistently paying bills on time and keeping credit utilization low are crucial strategies.

Chapter 7 filers might see improvement within two to three years, while Chapter 13 filers, due to their repayment plans, often experience a steadier, albeit slower, recovery.

Patience and disciplined financial habits are key to regaining a healthy credit profile.

Wait to apply for a loan after bankruptcy

Securing a loan post-bankruptcy requires patience and strategic planning. Lenders typically scrutinize your financial history, making it essential to demonstrate improved financial habits. Chapter 7 filers might need to wait two to four years before qualifying for conventional loans, while Chapter 13 filers could be eligible sooner due to their structured repayment plans.

Personal loans, auto loans, and credit-builder loans may be attainable, but expect higher interest rates. Mortgages and business loans often pose greater challenges, demanding a longer wait and a stronger credit profile. Establishing a positive payment history and maintaining a low debt-to-income ratio can significantly enhance your chances of approval. Persistence and financial discipline pave the way to new borrowing opportunities.

You must wait to file bankruptcy a second time

Filing for bankruptcy a second time involves stricter rules and longer waiting periods. For Chapter 7, you must wait eight years from your previous filing date. Chapter 13 requires a two-year gap. Courts scrutinize repeat filers more closely, often demanding detailed financial disclosures and rigorous repayment plans to prevent abuse of the system.

How to file Chapter 7 with no money

Many people are surprised to learn the initial cost to simply file for Chapter 7 bankruptcy is quite high. Some people mistakenly believe that, considering the financial context of bankruptcy, the initial filing should be free, or impose a nominal cost. Unfortunately, that is not reality. The average cost just to file for Chapter 7 bankruptcy is over $300 (specifically, $338). This amount includes the filing fee, administrative fee, and a trustee surcharge. However, it may be possible to file for Chapter 7 bankruptcy with no money upfront. For example, you may be eligible for a filing fee waiver.

To request a bankruptcy filing fee waiver, you will need to submit an application with the bankruptcy court detailing your financial situation, including your household income, expenses, assets, and debts. The court will review your fee waiver application and determine whether you qualify for waived fees based on the information you provided. The court will likely use a means test to assess the viability of your fee waiver request.

Key Takeaways

In summation, here’s what you can expect to happen after you file for bankruptcy:

  • Once you file the necessary paperwork and it is accepted by the bankruptcy court, an automatic stay will be issued, which halts the continued pursuit of repayment by debt collectors.
  • Your case will assigned to a trustee who conducts a review of your financial situation. In a Chapter 7 bankruptcy, the trustee will oversee the sale of non-exempt assets. In a Chapter 13 bankruptcy, the trustee will administer your repayment plan.
  • You will be required to attend a meeting of creditors in order to answer questions - under oath - about your finances and assets.
  • If your bankruptcy filing is approved, your eligible debts will be discharged, which effectively relieves you from having to repay them. Though, bear in mind that not all debts can be discharged via bankruptcy.
  • Be prepared to continue making payments toward non-dischargeable debts, which may include alimony, tax debts, and/or child support.

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