What Happens When You File For Bankruptcy?

Bankruptcy is basically a financial tool for businesses that offers relief through a number of ways. It allows businesses to pay off their debts through the liquidation of assets or a restructured debt repayment plan. 

It helps you eliminate debt but with some consequences. But what are these consequences? What happens when you file for bankruptcy?

In this guide, we will explain what bankruptcy is and what happens when you file for bankruptcy. So read on to understand how it works and what its ramifications are.

What Is Bankruptcy?

Bankruptcy is a legal process that allows businesses to pay off some or most of their debts. It puts them under the protection of the court to devise a plan for debt consolidation or elimination. Bankruptcy also gives businesses the opportunity to start fresh after a financial turmoil.

The following types of debt can be discharged in bankruptcy:

• Secured and unsecured loans
• Credit cards
• Business debts
• Medical bills
• Back rent
• Previous utility bills
• Collection accounts

However, alimony, some tax debts, government penalties and fines, and the debts not mentioned in your bankruptcy petition cannot be discharged in bankruptcy.

Types of Bankruptcy

There are various types of bankruptcy for different types of debtors and situations.

1. Chapter 7 (Liquidation): Designed for both businesses and individuals to liquidate their non-exempt assets to pay off the creditors. The rest of the debts are discharged.
2. Chapter 11 (Reorganization): Mainly designed for business owners to come up with a reorganization plan so they can keep their businesses afloat and pay off their debts over time.
3. Chapter 13 (Wage Earner’s Plan): Designed for individuals to come up with a repayment plan to pay their creditors in installments of up to 5 years while keeping their properties.

So what happens when you file for any of these types of bankruptcy? Well, continue reading to find out.

What Happens When You File For Bankruptcy?

When you file for bankruptcy, your credit score will take a serious hit and the bankruptcy will be reflected in your credit report for up to 10 years. It will also remain on public records indefinitely. 

Moreover, you may lose non-exempt assets to repay your creditors if you have filed for Chapter 7 bankruptcy.

Read on to find out what happens when you file for each type of bankruptcy:

1. Chapter 7 Bankruptcy

If you are filing for Chapter 7 bankruptcy, you will be required to pay a filing fee of $338. Once you’ve filed your petition, you will be required to provide the necessary documentation to your trustee. Then a meeting with your creditors will be held within 21 to 40 days to discuss your situation. 

Your non-exempt assets will then be liquidated by your trustee to distribute the returns to the creditors. All the remaining debt will be discharged within 6 months of your petition filing. However, to file for Chapter 7 bankruptcy, you will need to complete a credit counseling course.

2. Chapter 11 Bankruptcy

If you have filed for Chapter 11 bankruptcy, you will be able to reorganize your financial matters while running your business simultaneously. You will retain the control of your business and the court may appoint a creditor’s committee to come up with a reorganization plan.

This reorganization plan outlines how you will restructure the debts so your business can go back to making a profit. The plan must be approved by both the court and the creditors to ensure a fair decision.

Once the plan has been approved, you begin making the necessary operational changes and paying off your creditors over time.

3. Chapter 13 Bankruptcy

In order to file for Chapter 13 bankruptcy, you will need to complete a credit counseling course. After filing the petition, the court will help you pay off all or some of your debt within 5 years by paying in installments. 

You will also be required to provide the necessary documentation to your trustee. Then a meeting with your creditors will be held within 21 to 50 days to discuss your situation.

Once your repayment plan is approved within 45 days of the meeting, you will need to start paying the repayment installments within the first 30 days of filing.

Conclusion

Bankruptcy is a legal process designed to offer relief to debtors. It protects them from financial burdens and gives them a structured way to repay debt. However, it has serious consequences as it affects your credit score and can also result in asset loss.

Now that you know what happens when you file for bankruptcy, it is best to consult with an expert bankruptcy lawyer to get their advice and navigate the process.

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