When you file for bankruptcy, you initiate a legal process designed to help you eliminate or reduce debts you cannot repay, offering a fresh financial start but with significant consequences.
What Happens When You File Bankruptcy?
- Legal Process and Types : You file a petition in federal bankruptcy court, and depending on your situation, you choose between two main types of personal bankruptcy:
- Chapter 7 (liquidation): Your nonexempt assets are sold by a court-appointed trustee to pay creditors. Exempt assets like part of your home equity, personal items, and public benefits are protected. Most remaining debts are discharged within about 4 to 6 months, meaning you are no longer legally required to pay them, except for non-dischargeable debts like student loans, child support, and certain taxes
* **Chapter 13** (reorganization): You keep your assets but must follow a court-approved repayment plan lasting 3 to 5 years to pay back some or all of your debts. After completing the plan, remaining eligible debts are discharged
- Immediate Effects :
- Creditors must stop all collection activities, including lawsuits, wage garnishments, foreclosures, and repossessions once you file
* You attend a creditors' meeting where your financial situation is reviewed, and a trustee oversees the process
- Credit Impact :
- Bankruptcy remains on your credit report for 7 years (Chapter 13) or 10 years (Chapter 7), severely damaging your credit score and making it harder to obtain new credit or loans during that time
* Over time, you can rebuild credit by using secured credit cards and demonstrating responsible credit use
- Costs and Legal Help :
- Filing fees apply ($313 for Chapter 13, $338 for Chapter 7), and hiring an attorney is recommended to navigate the complex process
- After Bankruptcy :
- Once debts are discharged, creditors cannot legally pursue you for those debts.
- Bankruptcy is a fresh start but requires rebuilding your financial life and creditworthiness gradually
In summary, filing bankruptcy can relieve overwhelming debt but involves asset liquidation or repayment plans, a lasting credit impact, and legal procedures that require careful consideration and professional guidance
