What Happens When You File for Bankruptcy?
Any consumer bankruptcy follows a general bankruptcy process. You can expect the same bankruptcy timeline that includes:
- Gathering paperwork and bankruptcy forms
- Filing the bankruptcy petition
- Meeting with your bankruptcy trustee at the creditors' meeting
- Debt relief through unsecured debt discharge
Step 1: Consider the Types of Bankruptcy
The types of debt you are facing can determine which bankruptcy filing is right for you:
- Do you need more time to pay back the debt? Chapter 13 bankruptcy stops creditor harassment and gives you a repayment plan.
- Do you want credit card debt or medical bills dismissed? Chapter 7 bankruptcy discharges all unsecured debt to give you a fresh start. You must meet the Means Test to qualify for Chapter 7.
A bankruptcy attorney can help you review your debt and assets, bankruptcy laws, and the likely outcome of your bankruptcy case. When in doubt, seek professional legal help to decide how to proceed.
Step 2: Take Your First Credit Counseling Class
You are required to take a bankruptcy credit counseling course before you file. These classes are intended to help you stay out of future debt and avoid filing for bankruptcy again.
Step 3: Create a Statement of Intention
You will be required to fill out a Statement of Intention form for Chapter 7 bankruptcy. This details your intentions with your secured debt — usually property like real estate or your car. You can reaffirm the debt, surrender the property to pay off your debt, or pay off the remaining loan with a Motion to Redeem.
If you filed a Chapter 13 bankruptcy, then you will keep your property and pay it off in the repayment plan.
Your home and car may be exempt from bankruptcy under your state's bankruptcy exemptions. This means your bankruptcy trustee cannot take these assets and sell them to pay back your debt. A bankruptcy lawyer can help you understand your options to keep your home or vehicle.
Step 4: File Bankruptcy
You will file for bankruptcy in your local bankruptcy court. This involves filling out forms and providing documents to verify your information and income. The court will give you a case number and assign a bankruptcy trustee to oversee your case.
Filing bankruptcy should immediately stop all creditors from calling or harassing you. This is called an "automatic stay." If you are still getting calls, tell your attorney, because they are breaking the law.
Chapter 7 bankruptcy does not stop new debt, child support, some tax debts, or student loans, so you need to be careful about spending money.
It will dismiss some current financial problems, such as:
- Credit card debt
- Personal loans
- Medical debt
- Automatic wage garnishment from your paycheck
- Creditors suing you for debt
Unfortunately, your credit score will take a dramatic hit once the bankruptcy filing is approved. You will likely drop to a low credit score whether you had excellent credit or not. Your credit cards will also likely be shut down by each company, so you need to apply for new secured or prepaid credit cards.
Step 5: Pay a Filing Fee
Filing for bankruptcy always comes with a fee that you need to pay upfront or in installments. It varies by state, but you can expect around $300 for a Chapter 7 or Chapter 13 bankruptcy. If you cannot pay the fee right away, you have 120 days to pay the full amount.
You can apply to the bankruptcy court to make four payments. If approved, you will receive a court order listing the dates each payment is due. You cannot be late or miss these dates. Your entire bankruptcy case can be dismissed if you do not make these payments on time. In some cases, you can apply for a fee waiver and file for free.
Once you have successfully filed, the bankruptcy proceedings will begin.
Step 6: Prepare for Your Meeting of Creditors
The bankruptcy trustee you were assigned will give you a list of documents to bring to your meeting. You should be prepared to bring:
- Tax returns
- Paycheck copies
- Photo ID
- Social Security card
- Any other documents requested by the trustee
You need to provide information and documents as soon as possible. The trustee should give you a timeframe, and you need to comply with any "reasonable requests" they ask. Your case could be dismissed if you refuse information or miss the document timelines.
Step 7: Attend the Meeting of Creditors
The meeting of creditors invites your creditors to attend and discuss your bankruptcy paperwork. Most of the time they do not show up. The meeting can also be referred to as a "341 hearing."
In most cases, it will be just you and your bankruptcy trustee — no judge or courtroom is involved. It is a short meeting (around ten minutes) to discuss your paperwork and decide if you are eligible for a Chapter 7 discharge of current debt.
Once this meeting ends, you may have more documents to send in, such as your tax return for the year. Aside from that, the trustee will send your creditors the correct documents about your bankruptcy, and you likely won't have to see your trustee again.
Step 8: Take Your Second Credit Counseling Class
Once your case is approved, you must take a second course on financial management. You have 60 days to complete the second class and file a certificate of completion with the bankruptcy court. The 60-day time limit starts on the day of the creditor meeting.
Step 9: Rebuild Credit Over 1-2 Years
A Chapter 7 bankruptcy will be on your credit report history for ten years, and a Chapter 13 bankruptcy remains for seven years (if you complete the payment plan). You can start rebuilding your credit as soon as the bankruptcy discharge is approved. With careful steps and debt management, you can have a better credit score in one to two years after filing bankruptcy.
To rebuild credit, you can get a secured credit card or a prepaid card. These can be useful to keep new debt low while making on-time payments to rebuild your financial situation.
If you decided to keep your house or car, be sure to pay your car loan, mortgage, or rent payments on time.
Step 10: Make Any Needed Changes
If anything changes during your bankruptcy, you need to file an amendment with your bankruptcy court. The same is true if you made a mistake or uncovered missed information. If you lie on these forms, you can face charges of perjury.
An attorney can help you along the way and take legal action if creditors keep harassing you or there are mistakes on your credit report.