Filing for bankruptcy is a legal process that allows individuals or businesses to seek relief from their debts. It’s a complex procedure that can have significant financial and legal consequences. Here’s an overview of what generally happens when you file for bankruptcy:
1. Assessment of Financial Situation
- Credit Counseling: Most jurisdictions require you to undergo credit counseling to explore alternatives to bankruptcy.
- Determine Type of Bankruptcy: Depending on your situation, you may file for Chapter 7 (liquidation) or Chapter 13 (reorganization) bankruptcy in the U.S., or similar types in other countries.
2. Filing the Bankruptcy Petition
- Prepare Documents: You’ll need to prepare detailed documents outlining your financial situation, including assets, liabilities, income, and expenses.
- File with the Court: The bankruptcy petition is filed with the bankruptcy court, and a fee is usually required.
3. Automatic Stay
- Protection from Creditors: Once you file, an automatic stay is put in place, preventing creditors from taking collection actions against you.
4. Trustee Appointment
- Management of Assets: A trustee is appointed to oversee your case. In Chapter 7, they may liquidate non-exempt assets to pay creditors. In Chapter 13, they help facilitate a repayment plan.
5. Meeting of Creditors
- Discussion with Creditors: You’ll attend a meeting where creditors can ask questions about your financial situation.
6. Discharge or Repayment Plan
Chapter 7 (Liquidation Bankruptcy): This may require selling some assets to pay off part of the debt. However, certain assets like retirement accounts, homes, and cars may be exempt, depending on state laws.
Chapter 13 (Reorganization Bankruptcy): This option restructures debts, allowing partial or full payment over 3-5 years without selling property. Failure to comply with the payment plan may expose assets to creditors.
7. Impact on Credit
- Credit Score: Bankruptcy will significantly impact your credit score and remain on your credit report for 7-10 years, depending on the type of bankruptcy.
8. Legal Obligations and Restrictions
- Compliance with Court Orders: You must comply with all court orders and may have restrictions on obtaining new credit or making certain financial decisions.
9. Financial Education
- Debtor Education Course: You’ll likely be required to complete a financial education course to help you manage your finances in the future.
10. Long-term Consequences
- Difficulty Obtaining Credit: Declaring bankruptcy signals an inability to pay debts, harming credit history. Chapter 7 stays on credit reports for up to 10 years, while Chapter 13 remains for up to 7 years. Post-discharge, obtaining credit may be challenging, but some lenders specialize in working with those who have faced bankruptcy. Positive credit habits can help rebuild the score over time.
- Public Accessibility of Bankruptcy Filings: Bankruptcies are public records, accessible through the Public Access to Court Electronic Records (PACER) system. While primarily used by attorneys and creditors, anyone can register to view this information. Local newspapers may also publish public notices, and employers, landlords, and creditors might see the bankruptcy on credit reports during applications.
- Employment Concerns Related to Bankruptcy: With 29% of employers conducting credit checks on new applicants, bankruptcy could hinder job prospects, particularly in finance or government sectors. Current employers are less likely to conduct background checks, so existing employment is typically unaffected.
- Emotional Impact: The process can be stressful and emotionally taxing.