What Happens When You File Bankruptcy
Are you worried that your credit card debt is spiraling out of control and you don’t know what to do next? Do you wish there was a way to improve your financial situation, but you don’t know where to begin? Would trying to keep up with your bills create an undue hardship in your life? A bankruptcy filing can provide an incredible financial fresh start, so you can get your finances back on track and start building a better future. So it’s important to know what happens when you file bankruptcy.
Bankruptcy Law creates a powerful financial tool to help people get out of debt. Bankruptcy proceedings help an individual experience debt relief, including some immediate bankruptcy protection to legally stop the collection of debts, stop harassing phone calls and lawsuits, keep exempt property (including things with secured debt, like houses or cars), and start rebuilding their financial situation with a clean slate. Most people who file for bankruptcy will still have some form of debt after the process (like so many of us with student loan debt), but they will have paid off the majority of their debts, and have a better idea of what they can afford to pay in the future.
An Overview of the Steps to Filing Bankruptcy
If you’re considering filing bankruptcy, one of the first steps you will need to undertake is to figure out whether you can file for bankruptcy, and under which chapter (since there are different types of bankruptcy cases).
Assuming you have decided on filing for bankruptcy protection and decided under which chapter of bankruptcy you will file, the first step is to prepare your bankruptcy petition and schedules.
In your bankruptcy paperwork, you will be disclosing EVERYTHING about your financial situation and history – monthly income, regular expenses, disclosure of all your property, any bankruptcy exemption you are claiming, secured debt, unsecured debt, tax debt, any business that you may have an interest in (including as a sole proprietorship – anything and everything that you may have an interest in. All of this is part of your bankruptcy estate. A bankruptcy trustee will be assigned to oversee and administer this bankruptcy estate.
In addition, you will need a certificate of completion of the credit counseling course, and the filing fee. With respect to the case filing fee, if you have trouble paying it, you have 2 options. You can either file an application to pay the filing fee in installments, or if you believe that paying the filing fee would be an undue hardship, you can file a request to waive the filing fee.
Generally speaking, once you have these three parts ready, you are ready to file your case.
What happens after you file bankruptcy?
Filing for bankruptcy relief is a legal process that allows you to get out from under the weight of crushing and overwhelming debt. It will help you by stopping wage garnishments, repossessions, and mortgage foreclosure sales. Because of the power in the federal bankruptcy law, including judicial action to issue violations, an individual bankruptcy will stop both the secured creditor and unsecured creditors, alike, from harassing and threatening you, to stop calling you at work, and to stop any further collection actions.
Once your case gets filed in the appropriate bankruptcy court, within a few hours or so, you should receive a notice from the court identifying the bankruptcy judge assigned to your case, the bankruptcy trustee assigned to your case, as well as the date, time and location of your meeting of creditors. The period of time that you can expect the meeting of creditors is 30 – 45 days from the date you filed your bankruptcy paperwork in court.
Generally speaking, a bankruptcy trustee is assigned to each and every bankruptcy case filed. For the most part, the trustee assigned has the responsibility of representing the unsecured creditors in your case. In the chapter 13 bankruptcy case, where you propose a repayment plan to make a monthly payment to the trustee for either 3 years or 5 years, the trustee will also work with you to create a payment plan that meets the requirements of the bankruptcy laws.
The trustee is also the party that will conduct your meeting of creditors. The bankruptcy process requires that you provide the trustee administering your case certain documents within a reasonable time frame, though not later than 10 days before your hearing date. These documents may include things like:
- valid picture ID;
- social security card;
- copies of prior tax returns;
- copies of prepetition statements from any and all bank accounts;
- award letter demonstrating claimed social security income;
- evidence of payment from employers, like prepetition paystubs;
- information on any nonexempt property, including location and valuation;
- in chapter 13 bankruptcy cases, proof that you are current with secured debt for property you intend to keep, like proof of mortgage payment for your house.
The 341 Meeting of Creditors
At the meeting of creditors, the trustee will examine you briefly about your case, including but not limited to questions about:
- whether any of your unsecured debts were incurred in the 90 days before filing your case;
- whether you have transferred any credit card balances in the 90 days before filing your case;
- inquire about your monthly income, including sources, as well as your household expenses;
- inquire about any reasonably anticipated increase in income;
- inquire about any domestic support obligations, including child support payments;
- whether you experienced any loss of property before filing your case, such as a sale, transfer, foreclosure or repossession.
It’s important that you work with and cooperate with the trustee, including sending copies of requested documents (like your bankruptcy petition, proof of mortgage payment, etc.) because failure to do so may mean you won’t receive your bankruptcy discharge.
Assuming there aren’t any issues with your bankruptcy petition, the trustee normally closes their case with the filing of a Report of No Distribution (meaning, after due diligence, the trustee does not believe that there are assets to distribute in your case).
Under the Bankruptcy Code, the case remains open for about another 90 days. This is an opportunity for any creditors (like credit card companies, any secured creditor, or holders of claims against you) to file an objection to discharge. An objection to discharge is usually tied to an argument of either (i) bankruptcy fraud, or (ii) the discharge does not apply to those particular debts in bankruptcy.
If no objections are filed and/or sustained, the final requirement for you after filing your case is to complete and file the certificate of completion of the debtor education course (also known as the financial management course). Just as with the credit counseling course, you must complete the course with one of the credit counseling agencies approved by your specific bankruptcy court.
Once all of this is complete, the bankruptcy judge will sign the Order of Discharge, enter it in the docket, and your case will be closed. With your debts discharged, you can enjoy your financial fresh start, and start working on rebuilding your credit after bankruptcy.
Will you have to go to court?
As mentioned above, yes, when you file bankruptcy, you will be expected to go to court. In chapter 7 cases, for many debtors, it’s a single appearance – the 341 meeting of creditors. This is an opportunity for the trustee to ask you questions, as well as for any creditors to ask you questions.
For many people whose case is primarily unsecured debt, it’s rare for any creditor to appear. (It’s rare for a secured creditor to appear for a 341 meeting. Unsecured creditors often tend to appear when they are someone that had a close relationship with the bankruptcy filer, such as a friend that loaned them money.)
In the bankruptcy process, if you are seeking to keep property subject to a secured debt, the secured creditor will request that you enter into a reaffirmation agreement of that debt. When you reaffirm a debt, while the bankruptcy discharge terminates your personal liability for that debt, a reaffirmation agreement reinstates your liability. If you are seeking to reaffirm any particular debt, you will be expected to appear for a reaffirmation hearing.
In the chapter 13 bankruptcy process, there are generally more appearances, including the chapter 13 plan confirmation hearing.
Tips to get through the filing process
The stress of overwhelming debt can make figuring things out very difficult. Whether you’re considering alternatives to bankruptcy, or you’ve decided to file and trying to understand the consequences of bankruptcy, lots of different kinds of questions come up. Here are a few answers to some common questions, and tips to get you through the bankruptcy filing process.
Should you tell creditors you are filing bankruptcy?
When you’re facing thousands of dollars of debt, it’s easy to feel like the situation is hopeless. If you’re like most, you’ve tried to dig yourself out of debt, but can’t make any headway. You may have even picked up the phone to call a credit card company or a bank, or written a letter to your creditors in the hopes they would take pity on you and work out a payment plan to make payments over time. If you’ve called a credit card company, you might have had the unfortunate experience of dealing with an aggressive debt collector who told you that unless you agree to an immediate repayment plan, that they will take all types of actions against you, including suing you immediately.
Telling creditors that you are filing for bankruptcy doesn’t help you very much. The reason is that until they are given proof of a personal bankruptcy filing, they are under no obligation to stop their collection efforts. Also, telling a creditor that you are planning to file bankruptcy may give them a reason to act more aggressively, including trying to start a wage garnishment, before your case is actually filed. For these reasons, I generally suggest to clients that they should not tell creditors that they are planning to file for debt relief under the Bankruptcy Code.
Will I Lose My Property?
Many people that look into filing bankruptcy are concerned with losing their property in bankruptcy. It’s bad enough that people are afraid of losing their homes from foreclosure. The last thing you want to happen is to lose your home or your car or your cash in a bank account even after you are a bankruptcy filer. That’s why it’s really important that you understand bankruptcy before you actually file.
Unfortunately, the answer to this question is that it depends. First, it should go without saying, if you want to keep property, you have to be current with payments. For example, if you want to keep your house while filing for bankruptcy, you have to keep making your regular monthly mortgage payment.
Generally in bankruptcy, anything that you have an interest in is included in your filing. Assets, income, expenses, property, claims, etc. Everything is part of your case. You can keep, however, any property for which you can claim bankruptcy exemptions for. Any nonexempt assets may be liquidated by the trustee to pay creditors.
For example, let’s say you have a house that is worth $500,000. You have a mortgage against the house with a principal balance of $400,000. The bankruptcy exemption you can use allows you to “protect” $100,000 in equity. You can file bankruptcy and keep your house without question. Why? All of the value of the house is accounted for between the mortgage and the exemption. There is no nonexempt equity available.
Now, let’s assume similar facts: house worth $500,000, a mortgage with a principal balance of $400,000, but not the bankruptcy exemption you’re allowed to use is only $50,000. If you file chapter 7 bankruptcy, you will be expected to pay $50,000 to your creditors if you want to keep your house. Why? After accounting for the mortgage and your exemption, there is $50,000 in nonexempt equity.
This same math applies to any property you may have – a car, bank accounts, jewelry, a potential cause of action, etc. In chapter 7 bankruptcy, to keep property, you have to pay the dollar value of the nonexempt equity for your property.
Chapter 13 bankruptcy operates similarly in that, in any proposed repayment plan, you would have to pay the dollar value of the nonexempt assets you have.
Can I Keep My Sole Proprietorship Business If I File Chapter 7?
You may wonder if you’ll be able to keep your business as a sole proprietorship if you file bankruptcy. The short answer is “yes” you can keep your business, but there are some factors that may come into play. A business, whether as a sole proprietor or a separate business entity, has to be treated like any other asset. You have to determine whether the business has any value, whether you can any bankruptcy exemption to protect it, and then determine the value of any nonexempt property of the business.
If there is nonexempt property or value, then that is part of your bankruptcy estate that the trustee may seek to administer. If the debtor would like to keep the business, then the debtor will have to pay that nonexempt amount to the trustee.
What Happens to My Credit if I Declare Bankruptcy?
Bankruptcy is the legal process of discharging debts – making them unenforceable against you – when you are unable to pay them. If you are having trouble making your monthly payments, filing bankruptcy can be a life-changing option. The benefits include that the bankruptcy court will discharge your debts, thee automatic stay that goes into effect when your case is filed stops creditor harassment, and the discharge gives you a financial fresh start so that you can get back on your financial feet.
When you file bankruptcy, it will be listed on your credit report for up to ten years, but the effect on your credit score will vary depending on the type of bankruptcy you file. Many people, however, report experiencing an improvement in their credit score immediately after filing their case.
Are Bankruptcy Filings Publicly Available?
Bankruptcy filings are public record, so yes, they are publicly available. Bankruptcy records may be accessed using thee United States Courts’ PACER system. People that want to use the PACER system must first register for an account.
In some limited and emergency situations, a bankruptcy case may be filed under seal, so that the records are not publicly available. This may be critical for a crime victim, like a victim of domestic violence.
What Happens When I File Bankruptcy After You Have Been Sued?
It’s safe to say that no one enjoys being sued. Being sued by usually leads people to explore bankruptcy options. Fortunately, if you have been sued by a creditor, filing bankruptcy offers some pretty powerful and immediate debt relief. Immediately upon filing bankruptcy, the automatic stay goes into effect. This means that any and all debt collection and enforcement efforts against you must stop! Unless the creditor seeks relief from the automatic stay, the creditor is unable to get a judgment against you or to garnish your wages. (Secured creditors will often file a motion for relief from stay if they believe they have a right to proceed with a foreclosure or repossession.) If you are in debt, it may be much easier and affordable to file bankruptcy rather than defend against thee lawsuit. At a minimum, the filing of a straight bankruptcy will give you some space and time to figure your next steps.
What Happens to Student Loans When You File Bankruptcy?
You may have heard that filing personal bankruptcy can eliminate many debts, but what about student loan debt? For most people, the unfortunate truth is that (at least at the time of this writing), student loan debt is exempt from discharge in bankruptcy proceedings.
In some circumstances, you can seek relief under the Bankruptcy Code to get rid of your student loans. The process, however, is more involved. A bankruptcy filer will have to sue the student loan creditor for an order that the bankruptcy discharge also applies to the debt. While most courts around the country apply one of two tests, both tests require you to show that having to remain liable for the student loan debt would be an undue hardship for you moving forward after you get your bankruptcy discharge. Some successful examples include if you are a victim of school fraud, or if you are permanently disabled and can no longer work and earn an income, you may also be able to get rid of your student loans. The main point is that, although student loan debt is unsecured debt, it is presumed non-dischargeable in bankruptcy, but you may seek to discharge student loan debt under bankruptcy law if you can demonstrate that the loans create an undue hardship.
Since this aspect of bankruptcy proceedings is very heavy on legal procedure and substantive law, you may want to definitely consult with a bankruptcy attorney about suing over student loans.
If I Filed Bankruptcy Before, How Long Before I Can File Again?
If you have already filed bankruptcy, you may be wondering if you will ever be able to file again. The short answer is YES, you can file again. As to when you can file again, and filing bankruptcy under chapter 7 or chapter 13 bankruptcy, the answer depends on the type of bankruptcy you filed, when you filed it, and how your bankruptcy was ultimately resolved.
How long does bankruptcy stay on your credit?
Bankruptcy is a dirty word -or at least that’s what the consumer credit industry wants you to believe. According to these global financial institutions, they want you to believe that filing for bankruptcy means that you are a failure for not paying your debts. To further keep you from taking advantage of the financial fresh start you get when you file bankruptcy, they threaten you with indefinite damage to your credit.
Generally speaking, the credit bureaus created their own rules (not law) that they will report a bankruptcy filing for up to 10 years on your credit report. How long this marking is an actual negative impact lasts depends on a number of factors, including how long the individual or business was in debt and how the bankruptcy was resolved. Many people are able to rebuild their credit within a couple of years after filing bankruptcy. It all depends on your financial situation after your discharge is entered.
For example, many people ask me whether they can buy a house after filing bankruptcy. The answer is yes. Many lenders will consider bankruptcy a negative credit report event for only just 2 years after your filing. After 2 years, though, many lenders do not even consider the bankruptcy filing. (For FHA loans, the limit may be as low as one year if you can demonstrate special exigent circumstances that caused your filing.)
Contact New York Bankruptcy Lawyer Richard Kistnen Today to Discuss What Actually Happens When You File Bankruptcy
There’s a lot of misinformation about bankruptcy out there (like tax debt is not dischargeable). Much of it comes from the consumer credit industry, which wants you to believe that the most important thing you can do is pay your credit card debt (even over feeding your family).
What happens when you file bankruptcy is actually surprising to most people. It’s a much simpler, easier, and more pleasant experience than they imagined. If you’re ready to put an end to all the stress caused by crushing debt and file your personal bankruptcy, contact an experienced bankruptcy attorney, the Law Office of Richard Kistnen to start putting your bankruptcy paperwork together and file your chapter 7 bankruptcy today. You can schedule your confidential, no-obligation consultation by clicking here, or use the contact info below.