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What Happens When You File Bankruptcy?

Geeta Dhavale Jan 1, 2019
It is important to be aware of what happens when you file bankruptcy before you take any decision.
Even after so many people in America are filing for bankruptcy every day, people have a very little knowledge of what happens when you file bankruptcy. Generally people believe that they have to sell all their assets and lose everything.
But, this is not true. In fact, bankruptcy is a legal procedure that allows the debtor to start afresh by discharging all or a portion of their unsecured debts. It is one of the best options for those who are burdened with significant amount of loans and have very few assets.
You can also use it as a means to stop the creditors and debt collectors from seizing your property for not paying the mortgage installments and from harassing you for debt collection, etc.

Things that Happen When You Go Bankrupt

Well, what happens when you file bankruptcy depends largely on the kind of bankruptcy you file for. Basically there are four types of bankruptcy that are defined by the law section.

Chapter 7 Bankruptcy

This is one of the most common type and is also known as 'personal bankruptcy'. By this type of bankruptcy filing, most of the unsecured debts of a person are eliminated and it also prevents the creditors from taking further collection efforts. The property that is not exempted, is handed over to the bankruptcy trustee for liquidation.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is specially meant for businesses that wish to reorganize. A business seeks certain relief in terms of time and amount. It is a complex process and is subject to the nature of the business. This kind of bankruptcy can also be filed by individuals.

Chapter 12 Bankruptcy

This bankruptcy is meant only for family farmers. This type allows the farmer to pay back the debt over a certain time period. It has some special procedure and is not applicable to business or individuals who are not farmers.

Chapter 13 Bankruptcy

It is also known as 'reorganization bankruptcy' and allows the debtor to pay loans over a given time period without surrendering the property. To qualify for this type, your loan should not exceed a certain amount, and you have to submit a repayment plan to the bankruptcy court for approval. If the plan is not approved, bankruptcy is changed to chapter 7.
There are certain proceedings that are same for all types. The things that happen after bankruptcy are:
  • Once you file the bankruptcy in the court, an 'automatic stay' is issued. It prevents all the creditor and debt collectors from taking any action against on you and also from collection activities. It also puts the stay on the cases pending against you.
  • After around thirty days, you will be called for a meeting with your creditors which will also be attended by the bankruptcy trustee, where all your financial issues and bankruptcy will be discussed in details.
  • If you have filed for chapter 13 or chapter 11, then your repayment plan will be scrutinized and checked for practicability. The trustee will then observe and monitor, if you are making the repayment as the plan. Any failure in the plan will result in transforming the bankruptcy to chapter 7 where you can no more possess the property.
  • In chapter 7, the court will go through your papers, and the property which is non exempted will be handed over to the bankruptcy trustee for liquidation.
  • The bankruptcy trustee will go through your assets and decide which assets are to be sold so that the loan or debt gets repaid. You will be informed about this and may be even included in the decisions.
  • You are also informed to take all the decisions regarding your property, such as selling or renting the property, only after consulting the bankruptcy court and the trustee.
  • Within four to six months you will receive the discharge. In case of chapter 7, you have the right to back out or dismiss your bankruptcy until you obtain a discharge.
  • You get a license to start afresh. But bankruptcy charge will remain on your credit report for next seven to ten years, and may damage your credit and lower your self-esteem. You may face difficulty in getting new loans from the banks and creditors. But if you exhibit a good financial behavior, you may start getting loans easily after one or two years.
It is important to consult your attorney before you apply for loans again. You have to be very careful this time, because you don't want to go the way of bankruptcy again. Also there is a limit to the number of times you can apply for a bankruptcy.
Generally, it is once in six years but it is better to consult an attorney who will tell you how many times you can file bankruptcy, depending on the type you wish to file. Life after bankruptcy may be a little challenging, but certainly gives you one more chance to lead a good debt-free life.