What Really Happens When You Declare Bankruptcy?

How to Declare Bankruptcy

Bankruptcy is a last resort for many who file. After attempting to clean up a messy financial situation with other options, people with credit problems turn to bankruptcy, knowing it offers a drastic solution to a significant financial crisis. But until they reach they point many people don’t know how to declare bankruptcy.

What does it really mean to “declare bankruptcy”?

Understanding the bankruptcy process is an important part of deciding to file. Many people avoid bankruptcy, not really knowing how much it can help them. Others rush into it without realizing what a dramatic effect it will have in their lives – both good and bad.

If you’re considering bankruptcy or you are struggling financially and your preconceived ideas about bankruptcy have kept you from filing, there are several things you should know. Understanding what really happens when you declare bankruptcy will help you make the best decision for you.

Chapter 7 vs. Chapter 13

Many people believe bankruptcy wipes out their debt. It’s a fresh start and as if they’ve never had a credit problem. This is partially true. Bankruptcy does provide a fresh start, but your debt won’t be wiped clean without a bit of sacrifice on your part.

Bankruptcy is not free and your debt doesn’t just disappear. You’ll need to “pay” in Chapter 7 and Chapter 13.

It’s the way you pay that differs between the chapters when you declare bankruptcy.

In Chapter 7 bankruptcy, your assets are liquidated and your creditors are paid from the proceeds . Not all of your assets are subject to liquidation. However, you must carefully list exemptions and make sure the bankruptcy court understands what you want to protect when you file. A bankruptcy attorney can help you do this and ensure there are no mistakes.

Many assets can be exempted, but every situation is different, so it’s important to work with a bankruptcy expert when you file. You’ll also need to meet certain eligibility requirements to qualify for Chapter 7 bankruptcy.

In Chapter 13 bankruptcy, you pay back the debts you owe via a payment plan. Plans last three to five years and you don’t liquidate any of your assets. This chapter of bankruptcy is called “wage earner’s bankruptcy” because it requires a person to have an income to meet his or her payment plan obligations.

In both types of bankruptcy, at least a portion of the remaining debt is discharged after your bankruptcy obligations are met. In Chapter 7 this occurs after liquidation and in Chapter 13, it occurs after the repayment plan is complete.

What Happens When You First Declare Bankruptcy?

Officially filing for bankruptcy – which involves submitting your paperwork to the bankruptcy court – triggers a few different things to happen:

First, an automatic stay goes into effect. This legally blocks creditors from trying to collect payment for a debt from you. All collection actions, including foreclosure, must stop once you’ve filed for bankruptcy. This doesn’t mean you won’t eventually be forced to relinquish control of your assets or deal with the debt in another way. However, it puts a hold on what creditors can do until your bankruptcy is sorted out.

Next, you’ll need to enroll in bankruptcy classes. To receive a discharge, filers must complete credit counseling and debt education classes and submit proof to the court that they attended these classes.

You’ll also attend a meeting of creditors or the 341 meeting. This meeting is an opportunity for your creditors to state their case and raise any concerns about why your debt shouldn’t be discharged.

For many who declare bankruptcy, this meeting is one of the most intimidating aspects of the process. More often than not, though, it goes off without a hitch and there was no need to worry. Your bankruptcy attorney attends the meeting with you to offer support and ensure proper handling of your case .

Next is the liquidation of your assets or the assignment of your repayment plan, depending on whether you filed for Chapter 7 or Chapter 13. At this point, you’ll know exactly where you stand and what your situation will look like moving forward. You can learn more about the process of asset liquidation here.

And finally, your debts are discharged. This happens much sooner in Chapter 7 than it does in Chapter 13. However, once the discharge occurs, you’ll move forward with a fresh slate and be in control of your finances again without interference from the bankruptcy court.

Working with a Bankruptcy Attorney Makes It Easier to Declare Bankruptcy

Bankruptcy can be a complicated and intimidating process, but it might also be very beneficial. Understanding what really happens when you declare bankruptcy makes things easier. If you’d like to know or you want to discuss how bankruptcy can help you, contact the bankruptcy Law Office of Robert M. Geller at 813-254-5696 to schedule a free consultation.