Over 772,000 people filed for bankruptcy in 2019 in the U.S alone, and with the economy in constant flux, bankruptcy will feel like it strikes at complete random. And of those 772,000 people, most were facing the problem for a potential first time.
Should you face the misfortune of bankruptcy, it’s important to know exactly what you’re going into. But this isn’t exactly a topic your teachers covered in your high school economics class. What should you expect?
Well, look no further for the answer! We’re here to tell you all about what happens when you file bankruptcy!
But enough preamble, right? Let’s get into it!
Back to School With Bankruptcy 101
The first thing to understand about bankruptcy is that it gets decided in court. A judge and an independent contractor hired for the case (also known as a trustee) will review your information and determine if you are eligible for bankruptcy. If you are eligible, you will get a combination of your debt wiped clean or frozen until you can pay them off.
The second thing to understand about bankruptcy is that multiple types exist. The three primary types are Chapter 7, Chapter 11, and Chapter 13. Other types exist (like Chapter 12) but they tend to pertain to a very specific person or situation (i.e, occupation-based).
Chapter 7 is the most common type of bankruptcy that individuals will take out (as opposed to companies) This is because a Chapter 7 will forgive a lot of debts that have no collateral. That said, some non-collateral loans like student loans or back taxes remain illegible.
A Chapter 7 bankruptcy also incurs the risk of having to sell off some of your assets ( your car, your home, etc.) to satisfy the bankruptcy ruling. However, this is up to your state and the specifics of your case. Not all Chapter 7 rulings will require asset sales.
Back to School With Bankruptcy 101 Part 2
The other primary type for individuals is Chapter 13. The good news with this form of bankruptcy is that you don’t have to sell off any assets. The bad news is that the specifications to get into this type of bankruptcy are trickier. For instance, you aren’t allowed to have more than around $395,000 in unsecured debt (debt with no collateral) and around $1,185,000 in secured debt (debt with collateral).
Finally, there’s the Chapter 11 bankruptcy, intended for businesses. This type of bankruptcy allows companies to stave off creditors as long as they qualify for Chapter 11 and formulate an approved plan to start paying off the debt. This is a business favorite because they don’t have to give up the assets they would have with a Chapter 7.
All of these bankruptcies have different levels of qualifications in order for you to get them. Most require that you haven’t filed for bankruptcy in recent memory (rule of thumb is 6 years or so) and require you to pass a “means test” to determine if your finances are eligible to get considered for bankruptcy in the first place.
What Happens When You File Bankruptcy?
It’s important to note that filing for bankruptcy is a long and expensive task. Before you begin the filing process, it’s critical you schedule a meeting with a credit counselor for bankruptcy and debt help as well as assemble all your financial info in one place. Take every step you can to show the court you’ve tried to fix your situation before you file for bankruptcy.
Once you’ve gotten to the filing process and found a lawyer, the fees start to come in. It’s tempting to forego the lawyer and go in yourself, but all the other court officials can’t give you advice by law. Moreover, in the case of a legal action being threatened against you, hiring an attorney can provide valuable advice on how to pay off your debt quickly and correctly. So if you go at it alone, you run the risk of making some irreversible mistakes because you didn’t know the proverbial rules of the game.
Once all that is out of the way, the court trustee will arrange a big meeting for you, your lawyer, and all your creditors to hash out your exact financial situation. Finally, the judge and trustee will come to a decision and you will begin your next steps based on the type of bankruptcy you filed for. In addition to this plan, the state will require you to take a course on finances with an approved instructor.
As to when all this ends? It takes about 6 months for Chapter 7 bankruptcy to clear all your approved debts, a few years if you’re paying them off over time with Chapter 11 or 13.
The Side Effects of Filing for Bankruptcy
When you file for bankruptcy, one side effect that will factor in is your immunity from creditors. Should you get approved, you no longer have to worry about the stress of people hounding you day in and day out to pay them, as the court issues an order for all creditors to back off when you file.
On the negative side, bankruptcy will have effects on your financial record. Your credit score will plummet, raising your interest on credit card bills and making new card approvals difficult to obtain. Certain jobs will also not hire you on the grounds of having filed for bankruptcy in the past, as they see you as a financial risk.
Your bankruptcy also does not protect anyone who co-signed a loan with you. The responsibility transfers to them by law to pay some or the entirety of the loan.
It’s Tough Out There
So now that you know all about what happens when you file bankruptcy, what are your next steps? Well, keep in mind if you incur this kind of financial trouble, there are more options to explore (like debt management plans) before you go to bankruptcy.
And if you know anyone going through this kind of financial hardship, swing this article their way if you liked it! It’s tough out there, and we all need all the help we can get.