What Happens After Chapter 7 Bankruptcy?
Table of Contents
- What happens after you file for Chapter 7 bankruptcy?
- What CANNOT be discharged under Chapter 7?
- Can tax debt be discharged?
- Can student loans be discharged?
- Can secured debts be discharged?
- Will the IRS audit me after I file Chapter 7 bankruptcy?
- My ex-spouse is filing for bankruptcy. Can they get out of their child support obligations through Chapter 7 bankruptcy?
- How can you clean up your credit report after bankruptcy?
- Find a bankruptcy lawyer
This article answers some frequently asked questions (FAQ) on what happens after filing for Chapter 7 bankruptcy.
After you file for Chapter 7 bankruptcy, several things will happen. These include:
1) You will be assigned a bankruptcy trustee who will oversee your filing.
As soon as you file for bankruptcy, a trustee will be assigned to your bankruptcy case. The trustee is responsible for managing your bankruptcy estate. The trustee will also oversee the process of selling your non-exempt assets and distributing the proceeds to creditors.
2) An automatic stay will come into effect.
Ensure your creditors don't come after you for car loans, unsecured debts, and other non-exempt property
Stop most wage garnishments (wage garnishment occurs when some amount of your monthly income is taken from your paycheck to pay to your creditor)
Bankruptcy laws allow for any debtor to bring a civil suit against a creditor for willful violation of the automatic stay. A debtor also can recover damages.
3) The trustee will call a meeting of creditors.
The trustee will call a meeting of creditors (sometimes called the 341 meeting) to speak to you about your financial situation. After you file for bankruptcy, you'll receive a notice that informs you where and when this meeting will be held. Creditors also can attend this hearing, but in many cases, they don't.
4) An individual who files will need to take credit counseling and financial management courses.
If you file for bankruptcy, you will need to complete two courses. These are:
- A pre-petition credit counseling
- A post-petition financial management course
You should note the bankruptcy court will not discharge your debts until you complete these courses.
5) The trustee will sell non-exempt property and finalize no-asset cases.
If you have non-exempt property, the trustee will try to auction or sell those assets to pay creditors. But if no property can be sold because all assets are exempt, the trustee will inform the bankruptcy judge. Then, the judge will likely enter an order discharging your debt. The trustee will also notify creditors advising them that there are no assets with which to pay them.
Many times, because of court-ordered payment plans and consequences to credit scores, what happens after Chapter 7 bankruptcy depends on the discharged debt in the bankruptcy. The main reason behind bankruptcy is to give the debtor a fresh start. Accordingly, most unsecured debt, like credit card debt, can be discharged in bankruptcy. Exceptions to debts that can be discharged include:
- Government-funded student loans
- Certain forms of tax debt
- Federal tax liens
- Child support
- Alimony or spousal support
- Debts for personal injury or death caused by the debtor's operation of a motor vehicle
- Fines and penalties for violating the law
- Certain tax-advantaged retirement plans
- Cooperative housing fees
Some debts cannot be discharged under Chapter 7 but may be discharged under Chapter 13:
- Debts for willful and malicious injury to property
- Non-dischargeable tax obligations
- Property settlements in divorce or separation proceedings
But there are certain exceptions to these rules.
The bankruptcy court may discharge your tax debt if all the following elements are met:
- The taxes are income taxes; taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy
- You did not commit fraud or willful evasion
- The debt is at least three years old
- You filed a tax return
- The IRS assessed the income tax debt at least 240 days before you filed your bankruptcy petition, or it has not yet been assessed
Private student loans are sometimes discharged, though it is rare. Courts keep closely to the requirement that you must show that paying off the loan will impose an "undue hardship" on you and your dependents. To get this debt relief, filers must show that they cannot pay the student loan payments now and will not be able to in the future. Courts have been more likely to grant this discharge in the cases of debtors who are permanently disabled from working. Chapter 13 bankruptcy allows you to include the student loan in your repayment plan, but you are still responsible for all the debt that remains once your payment plan is complete.
Secured debts are debts that have security interests attached to them. For example, a mortgage is a loan attached to your home. This means the bank can start a foreclosure of the home if you default on your mortgage. When you file for bankruptcy, the secured debtor will still have the right to take the property back to pay off the debt per your state laws. But if you want to keep the property, you have a few options. These include:
- Sign a reaffirmation agreement agreeing you'll still owe the money even after the bankruptcy process is finalized
- Buy the property back from the creditor
- Continue making payments on the property
No law or regulation prompts the IRS to pay closer attention to, or audit, those who file bankruptcy. It also would be impractical for the IRS to target everyone who files bankruptcy—there are simply too many (approx. 1.5 million per year). The IRS generally focuses on those who do not file their tax forms, do not pay their taxes, or files inaccurate or fraudulent information.
My ex-spouse is filing for bankruptcy. Can they get out of their child support obligations through Chapter 7 bankruptcy?
No. There are certain types of debts that the courts will not excuse. "Priority debts" are a type of debt that the court considers too important for a bankruptcy discharge. Child support is a priority debt. So, your ex-spouse will still be responsible for child support even after they file a Chapter 7 bankruptcy.
My spouse was married before, and they accrued a lot of debt and filed bankruptcy. This was over eight years ago, but the bankruptcy still appears on credit reports. We've also taken care of a lot of old debt, but it still shows up on our credit report as unpaid. How can we fix it?
Chapter 7 bankruptcy typically stays on a credit report for 10 years. But it can be removed in certain circumstances. There also have been plenty of times when credit reports have been inaccurate. You can clean up an inaccurate credit report with the credit bureau itself. There is a form called "request for reinvestigation" that is available with your credit report. You could fill this out and submit it to the credit bureau. Or you can write the credit bureau and include all of the inaccurate information that needs to be updated.
A communication to the bureau should request a reinvestigation of all the inaccurate information. If the bureau insists that the information is accurate, you can directly contact the creditors and have them verify that the debts have been satisfied in writing. Then, you can send that writing to the bureau as proof and ask them to update the information. You can also call the customer service line of the credit bureau.
Having bad credit can prevent you from being approved for loans and mortgages. Clearing up and updating your credit history should assist in securing a loan or a mortgage, or a secured credit card. But you can still expect to pay higher interest rates, pay a higher down payment, or even need a co-signer. Because of credit history complications, it might be a good idea to use a mortgage broker if you decide to buy a house.
Bankruptcy is almost always stressful for those who go through it. But life after bankruptcy is often less stressful, with improved financial security. In any event, you want to make sure you get the most favorable outcome for you and your family. You may benefit from a legal consultation. If you need help understanding the bankruptcy basics of Chapter 7 and Chapter 13 or need help planning your future after a filing, consider speaking with a local bankruptcy lawyer.