What Happens When You File for Bankruptcy?

Learn about how a bankruptcy case proceeds and how it might affect your finances.

The benefits of filing for bankruptcy include getting rid of burdensome debt and, in some cases, keeping property that you might otherwise lose to foreclosure or repossession. However, it will also have other effects, such as remaining on your credit report for up to ten years. In this article, you’ll learn about the bankruptcy process and the impact you can expect it to have on your finances.

Completing Required Paperwork and Counseling Courses

To start a bankruptcy case, you’ll need to tell the court about your debts, income, assets, and financial transactions. You’ll do so by completing official bankruptcy paperwork and submitting supporting documentation, such as bank statements, paycheck stubs, and income tax returns.

Bankruptcy law also requires debtors to take online credit counseling classes before and after filing. After you complete each course, you must file a certificate with the court (or the company might do so for you). The court will dismiss your case if you fail to file proof of completion in a timely fashion.

Filing the Case Stops Collection Activity

Immediately after filing a bankruptcy case, the automatic stay protection from creditors begins. The automatic stay is a court order that prohibits collection action and remains in effect until the case ends, or a creditor asks the court to lift the stay, and the court agrees to do so. As long as it is in place, creditors cannot continue their collection actions, including wage garnishments, lawsuits, letters, or telephone calls.

Attending the Meeting of Creditors

Shortly after filing for bankruptcy, you (and your attorney, if you have one) will attend a hearing called the 341 meeting of creditors. Creditors can participate by asking you questions about your assets, income, and financial transactions, but few attend the meeting. The bankruptcy trustee—an appointed official who oversees each bankruptcy case as it moves through the system—will conduct the hearing.

In a Chapter 7 case, the trustee will sell nonexempt property (assets that you can’t keep) and distribute the money to creditors. In Chapter 13, the trustee will oversee your Chapter 13 repayment plan, collects plan payments, and distribute money to creditors. In most cases, the trustee hearing is the only time you will interact with a bankruptcy official.

At the hearing (regardless of the chapter), the trustee will verify your identity and ask you questions under oath about anything that the trustee feels needs clarification.

(Find out more in What Questions Will the Bankruptcy Trustee Ask at the 341 Meeting of Creditors?)

Debt That Gets Wiped Out in Bankruptcy

Various debts are treated differently in bankruptcy. You’ll be able to wipe out (discharge) major credit card and department store debt (but usually not charges for electronics, furnishings, and jewelry), medical bills, personal loans, and utility bills. You’ll remain responsible for things such as student loans, most (but not all) taxes, fines and restitution, and family support.

To keep a house or car in a Chapter 7 case, you need to be current on your payment when you file and maintain payments after your bankruptcy. If you’re behind, and you have enough income to catch up over three to five years, you can do so by paying into a Chapter 13 repayment plan.

(Learn about debt that won’t go away in Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.)

Receiving the Bankruptcy Discharge

For most people, the goal of filing bankruptcy is to get a discharge—a court order that says you don’t have to pay for qualifying debts. After the bankruptcy court approves a discharge, creditors can’t continue to try to make you pay on the discharged bills. If the court finds that an attempt to make you pay violates the discharge, the court will likely assess penalties.

Lenders Will Close Your Accounts

You’re required to list everyone that you owe money to in your bankruptcy paperwork without exception. You can count on your creditors finding out about your bankruptcy because notices of your filing will get mailed to your creditors automatically. Shortly afterward, your lenders will cancel any open lines of credit, even if you’re current on payments.

As well, the trustee will scrutinize any financial transactions you make in the 90 days before filing your case. In this period it is best to stop using credit cards and move to paying all necessary expenses in cash. This practice will also prepare you to live without credit until you can rebuild your finances.

Questions for Your Attorney

  • How do I prepare to file a bankruptcy case?
  • Will my creditors appear at the meeting of creditors?
  • Can you help me if a creditor contacts me after my case?
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