No one wants to go through the process of a bankruptcy, but unfortunately, it can happen. You may be wondering if someone looks up your name online whether they’ll see details of your bankruptcy. You might also have questions about how the process works and how long it can affect you.
Below are answers to these questions in this general guide to what happens during bankruptcy.
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What is Bankruptcy?
Bankruptcy is an option that can be available when your debts aren’t manageable anymore. There are significant, long-term financial consequences, so it’s something you have to think carefully about before you proceed.
If you have large debts you aren’t able to repay, you’re behind on your mortgage, and your home is in danger of foreclosure, declaring bankruptcy is one possible option.
Bankruptcy can reduce or eliminate your debts and may help you save your home, but your credit score is going to be significantly impacted. Bankruptcy affects your ability to get credit in the future, you may have to pay higher rates for insurance. It can also mean that you are not able to get a job in some circumstances, depending on the position.
Federal courts handle bankruptcy, and there are six types identified by federal law, although Chapter 7 and Chapter 13 are the most common people use. Chapter 11 is also common, but it’s for businesses.
Chapter 7 is the type of bankruptcy individuals most often file, also known as the liquidation or straight bankruptcy.
A court appoints a trustee to sell some of your property. Then, the proceeds of doing so are used to repay your creditors. After that happens, your debts are considered discharged.
Certain types of property are exempt from being liquidated, such as your car, clothing, household goods, and the portion of equity you have in your home.
Chapter 13 bankruptcy is different in that you get a court-approved plan to repay some or all of your debts over a period of three to five years. Some debts you owe might also be discharged, and since you aren’t required to liquidate assets, you can retain your home if you keep up with the payments you agree on.
There are some types of debts that you can’t discharge in bankruptcy, including child support and alimony, student loans, and some tax debts.
The Process
There are a lot of legal steps you have to go through to file for bankruptcy. If you don’t complete them, it can lead to your case being dismissed.
Before you can file for bankruptcy, individuals have to go through a credit counseling session. You also need a certificate that you went to the counseling sessions that you’ll file with your petition for bankruptcy.
The counselor goes over your situation and gives you advice on debt management and budgeting. The counselor will also talk with you about bankruptcy alternatives. You can find agencies that are approved by the government if you call the federal bankruptcy court that’s closest to you.
You’ll submit a bankruptcy petition and also financial statements with your income, debts, and assets. You’ll have to submit what’s called a means test form to determine if your income is low enough for qualification for Chapter 7. If your income isn’t low enough, you have to instead file for Chapter 13.
You’ll pay a filing fee as well, but it can be waived in circumstances where a person can’t afford it.
The bankruptcy court can give you the needed forms, or you can work with a bankruptcy lawyer.
After you file for bankruptcy, there’s a trustee who is assigned to your case.
The trustee arranges for your creditors to meet, which is a 341 meeting. This is when the individuals or businesses you owe money to can ask questions and learn about your finances and situation, and whether or not you have plans to repay them.
Your case is decided by a bankruptcy judge.
If the court thinks you’ve tried to hide assets or be fraudulent with anything, you might lose your case, or you could face criminal prosecution.
Unless you have a pretty complex case, you won’t have to appear in court.
After you file, before your debts are discharged, you’re required to take a debtor education course, and you’ll also need a certification showing you completed this.
Chapter 7 vs. Chapter 13 Bankruptcy
A chapter 7 bankruptcy is considered liquidation bankruptcy. If you have a limited income and don’t own a home, this is your likely best option. Chapter 13 is called reorganization bankruptcy, and you can keep your property if you follow your repayment plan set by the court.
For chapter 7 bankruptcies, you usually only wait three to five months to receive a discharge. Chapter 13 it’s upon completion of your payments that are in your plan, which takes three to five years.
In chapter 13 bankruptcy, you can keep your property. You have to pay unsecured creditors an amount equal to the value of your assets considered nonexempt.
The benefit of chapter 7 is that you can quickly discharge most of your debts and begin fresh. The benefit of a chapter 13 is that you can keep your property and catch up on your debt payments that are a priority, like your mortgage.
One of the differences between the two types of bankruptcy, as mentioned, is eligibility based on your income. Chapter 7 bankruptcy requires you to have an income that’s below the median level for your state. Another option would be to pass a means test, which determines if you can be reasonably expected to repay your debt with your disposable income left over after you pay for your essentials.
If you don’t qualify for chapter 7, you have to instead look at chapter 13.
How It Affects Your Credit
Your credit may already be in pretty bad shape by the time you decide to consider bankruptcy because of missed payments and high balances.
Even so, the bankruptcy itself is also going to have a negative impact on your credit score and your creditworthiness from the perspective of lenders.
As time goes on, the impact lessens, but still, chapter 7 bankruptcy stays on your report for up to 10 years. Chapter 13 stays on your credit for up to seven years.
Will Your Bankruptcy Be Public Information?
You may feel nervous about filing for bankruptcy not only because of the financial impacts but also the fear that other people might find out.
For example, newspapers often publish public record notices, and people fear coworkers and people they know will see their filings.
Everything filed that relates to a bankruptcy case is public record, other than confidential personal information like your Social Security number.
That means, in a technical sense, yes, your filing is available for viewing from anyone who wants to take steps to see it.
There’s more to it than that, and most people won’t actually see it.
After you file your paperwork for bankruptcy, your petition and schedules are filed in the bankruptcy court. The clerk uploads them into a system used by Federal courts for storing and accessing documents.
Anyone who has access to the Federal court system can access the information to find bankruptcy filings. You need a password for access, and the system is primarily only going to be used by bankruptcy attorneys.
It’s pretty unlikely that anyone would accidentally happen across your case, and most people aren’t going to dedicate the time to try and gain access to the information.
Publishing bankruptcy information in something like a community newspaper isn’t completely out of the question but is very rare and non-widespread.
Rebuilding
After you file for bankruptcy, your biggest goal is likely going to be rebuilding your life, particularly financially.
You will have a hard time getting new credit while the bankruptcy is on your credit report, but over time, if you can show a history of using the credit you can get responsibly, your score will start to slowly go up.
A secured credit card is one way people can begin rebuilding credit. With a secured credit card, you pay a deposit, and you can spend up to that much money on the card. Then, you repay the card as you would with a traditional credit card.
If you want to avoid bankruptcy altogether, you may still have options available to you. You should make sure you’ve explored every option, including debt consolidation or settlement, or debt management.
Debt management is available from nonprofit credit counseling agents as a way to reduce the interest you pay on credit card debt and have an affordable monthly payment. Debt consolidation combines all the loans you have so that you can make organized, regular payments.
Debt settlement is a way to negotiate with creditors so you can try and directly reduce your debts and lower your balance.
Debt settlement does still impact your credit, though.
Talking to a legal professional can be the best thing to do before you make any decision on how to handle your debt and whether bankruptcy is right for you.