Bankruptcy is typically considered a last resort, allowing people who are struggling with debt to receive a fresh start. However, while bankruptcy does erase most types of debt, it can be a complicated process. If you’re uncertain of what happens when you file for bankruptcy and what you can expect, we’re breaking down the process from what happens to your property to your credit report and more.
When a person declares bankruptcy, the individual declares that they are financially unable to pay their debts and are seeking to have them either liquidated or restructured. Once the filing occurs, debt creditors and collection agencies must cease all contact with you, meaning they must stop wage garnishment and foreclosure, end all forms of communication, and stop any legal proceedings. This gives you and your bankruptcy attorney time to gather documentation, file the proper forms, and prepare for settlement negotiations.
There are two types of bankruptcy, so what happens when you file for bankruptcy is determined by the type you choose.
Chapter 7 allows you to liquidate a majority of your debt so that it can be eliminated completely and absolve you from repayment. Because this type of bankruptcy is only available to people who meet certain income guidelines and means testing, the individual does not have to pay back the debts. Instead, a bankruptcy trustee will gather your nonexempt valuable assets, such as non-retirement investments or a secondary vehicle, and sell them, using the proceeds to pay off as much of the debt as possible. Once this is complete, any eligible debt left over is discharged, leaving you free to start over with a clean slate.
Chapter 13 bankruptcy, sometimes called a “wage earner’s bankruptcy,” reorganizes and restructures your debt by creating a payment plan to repay all or a portion of what you owe. During this time, your debts are reviewed along with your income and monthly living expenses, and you must propose a feasible repayment plan based on applying your disposable income to debt repayment. One monthly payment is made to a trustee who then makes payments to creditors for three to five years. At the end of the time period, anything leftover of the eligible debts is then discharged
One of the biggest questions people ask when they want to know what happens when they file for bankruptcy is specifically what happens to their home or vehicle. Let’s talk about Chapter 7 and Chapter 13 and see how they’re different.
If you are able to remain in good standing with your home or car payment, and you are not in foreclosure or repossession, you may be able to keep them. However, you may lose equity in your home or you may lose your vehicle if it is worth over a certain amount due to Florida’s exemption laws.
If foreclosure proceedings have already started, these will be forced to stop temporarily, but because bankruptcy only absolves you of unsecured debts, the bank can still start a foreclosure once the bankruptcy proceedings have ended.
Because your debts are restructured in this type of bankruptcy, you can actually get out from under foreclosure or repossession by catching up on your late payments. If you’ve maintained good standing on your mortgage or car payment prior to Chapter 13, you won’t lose any of your property, making this a more preferred option for people with equity in their homes.
Filing for bankruptcy will negatively affect your credit, making it difficult to establish lines of credit, rent an apartment, or get a bank loan. A Chapter 13 bankruptcy will stay on your credit for 7 years while Chapter 7 stays on your credit report for 10 years. However, the more time that passes after your bankruptcy, you’ll have opportunities to improve your credit. If you do take out a credit card or small loan, it’s important to stay on top of any payments because late payments after bankruptcy can make it even harder to improve your credit report.
While government agencies and financial companies may run credit checks on prospective employees, an overwhelming majority of employers do not. Also, bankruptcy does not show up on a criminal background check, so filing bankruptcy will not affect it at all.
Employers rarely run credit checks on current employees, so if you already have a job, declaring bankruptcy should not affect your employment.
If you are concerned about debt and would like to know more about what happens after you file for bankruptcy, contact an experienced bankruptcy attorney in Florida at Stiberman Law. Schedule a free consultation by calling us at (954) 932-7804 or fill out the form below to get started.
Speaking to our law firm is always 100% confidential. We do our best to respond to inquiries in under 24 hours.
We’ll get in touch as soon as possible.