What Happens When You File For Bankruptcy?

Written By: Attorney Robert Stiberman | Bankruptcy Updated April 18, 2023

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.

What Does It Mean to File for Bankruptcy

When a person declares bankruptcy, the individual filing for bankruptcy declares that they are financially unable to pay their debts and are seeking to have them either liquidated or restructured. Once you’ve filed for bankruptcy, 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.

Types of Bankruptcy

There are six different types of bankruptcies, Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. Chapter 7 bankruptcy is the most common type of bankruptcy filed in Florida, followed by Chapter 13. See our Complete Guide to Filing for bankruptcy in Florida. Because there are different types of bankruptcy, what happens when you file for bankruptcy is determined by the type you choose.

What happens when you file Chapter 7 bankruptcy

Chapter 7 is commonly referred to as a liquidation bankruptcy and it can be filed by businesses seeking to wind and down and liquidate their assets and by individuals wanting to discharge a majority of debt such as credit cards and medical bills without any repayment. For individuals, Chapter 7 is only available to people who meet certain income guidelines and means testing, to ensure the individual does not have the means to pay back the debts.

A chapter bankruptcy trustee will gather your nonexempt valuable assets 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.

What happens when you file Chapter 13 bankruptcy

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. Different than chapter 7, chapter 13 can only be filed by individuals.

Who declares bankruptcy?

As of September 2022, 383,810 bankruptcies were filed in the U.S. in 2022. Many people filing bankruptcy are facing financial hardship and do not see their income improving anytime soon to have sufficient funds to repay their debts. Most people file bankruptcy as a last resort after attempts of negotiation and debt consolidation. Many of our clients declare bankruptcy to stop wage garnishments, lawsuits, collection actions, and foreclosure proceedings. Many people file bankruptcy seeking to enter into a structured repayment plan where they feel they are paying something back within their means. Bankruptcy is meant to provide a fresh start or a way to start over. Although Student loans

What Happens To Your Property When You File for Bankruptcy?

What happens to your property in bankruptcy is determined by (a) the type of bankruptcy you file, (b) the availability of exemptions to protect your property, and (c) the allowed claims filed by creditors in your bankruptcy.

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. According to the Bankruptcy code your assets become part of the bankruptcy estate the moment you file. This doesn’t necessarily that you will lose your assets. The bankruptcy trustee assigned to your case will review your assets to determine if any nonexempt assets should be liquidated in a chapter 7 bankruptcy or considered to meet the chapter 7 liquidation test in a chapter 13 bankruptcy.

In this section we will discuss what happens to your property in chapter 7 and in chapter 13 bankruptcy. See Chapter 7 and Chapter 13 and see how they’re different.

Chapter 7

In chapter 7 bankruptcy your non-exempt assets can be liquidated by the chapter 7 trustee to pay your creditors. This means that if you have assets that you cannot claim as exempt property, you could potentially lose those assets in chapter 7 bankruptcy. Florida has some of the best exemptions in the country to protect your property, such as the Florida homestead exemption. Florida has many other exemption you can use to protect your property or belongings such as the $1000 Motor vehicle exemption and the $4000 wildcard exemption for people not claiming the homestead exemption. See here for a comprehensive discussion on Florida exemptions.

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.

Chapter 13

Different that in chapter 7, in a chapter 13 bankruptcy the trustee will not seek to liquidate your assets. Chapter 13 bankruptcy does not involver a liquidation of your property, but rather a restructuring of your debts. 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 you won’t lose any of your property, making this a more preferred option for people with equity in their homes or other nonexempt property.

Chapter 11 bankruptcy

In a chapter 11, and individual or business debtor must present a plan of reorganization. Different than chapter 13, creditors will be able to vote on the approval of your plan.

What Happens to Your Credit Score When You File for Bankruptcy?

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.

Does Filing For Bankruptcy Affect Employment Opportunities?

While government agencies and financial companies may run credit checks on prospective employees, an overwhelming majority of employers do not. Federal law prohibits employers to discriminate a person that sough protection under the bankruptcy process. Some businesses in the financial and insurance sector may have bankruptcy specific guidelines that may affect employees in those industries.

Employers rarely run credit checks on current employees, so if you already have a job, declaring bankruptcy should not affect your employment.

Bankruptcy Terms to Know

You may encounter certain terms during a bankruptcy proceeding that you may not understand. Here are some of the most common bankruptcy terms and their meaning:

• Automatic Stay – A temporary freeze on most legal proceedings and creditor communications that goes into effect when you file bankruptcy.
• Bankruptcy Trustee – A non-government employee appointed to administer your bankruptcy case.
• Discharge – Receiving a discharge in bankruptcy means that you are no longer personally responsible for eligible debts included in the bankruptcy.
• 341 Meeting of Creditors – A mandatory meeting where your bankruptcy trustee will examine you under oath which usually takes place within 45 days of filing for bankruptcy. Creditors also have an opportunity to ask you limited questions but they rarely appear the meeting.
• No asset case – a bankruptcy case where there aren’t any assets to liquidate for the benefit of creditors.
• Confirmation Hearing – A monthly bankruptcy hearing where the chapter 13 bankruptcy trustee decides whether to: recommend confirmation of the chapter 13 plan, recommend dismissal of the chapter 13 bankruptcy, or continue the hearing for the following month for further review.
• Debtor – the individual or business that files for bankruptcy is referred to as the debtor. When a married couple file bankruptcy together, the spouses are referred to as Debtor and Joint Debtor, or Debtors.

Schedule a Consultation With a Bankruptcy Lawyer Today

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.

Written By:

Attorney Robert Stiberman

Robert is an experienced bankruptcy attorney adept at handling Chapter 7, 13, and 11 filings, with more than 15 years of experience in bankruptcy cases. Robert represents clients in both consumer and business bankruptcy ... Read More