What happens when you file for bankruptcy?

You’ve taken the difficult but necessary step of filing for bankruptcy and may be wondering what your financial future holds once the dust has settled.

To question what happens when you file for bankruptcy is both natural and responsible. It shows that you’re concerned with the immediate repercussions and are looking forward to the clean slate bankruptcy provides. The fact is, filing bankruptcy does have longstanding effects, each of which can be improved or repaired through time and sound financial decisions. In most circumstances, the results of your bankruptcy filing are overshadowed by the prospect of a brand-new beginning.

what happens when you file for bankruptcy

What does it mean to file for bankruptcy?

Bankruptcy is the legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be utilized to repay a portion of outstanding debt. The court will also review your incoming earnings and weigh them against your
monthly expenses.

If your filing is approved, then your debt will be discharged or restructured appropriately depending on which chapter you filed and the court’s specific instructions.

There are various types of bankruptcy, commonly referred to by their chapter within the U.S. Bankruptcy Code. Chapters 7, 11 and 13 are the most commonly filed chapters and we’ll go further into detail on each of these options.

Bankruptcy is intended for those who are unable to uphold their financial obligations to creditors and are unable to do so through alternative means.

Different types of bankruptcy you can file

Knowing what happens when you file for bankruptcy depends on the type of bankruptcy you file for. Here’s a quick breakdown of the ways you can file.

Chapter 7 Bankruptcy

Often referred to as a straight bankruptcy, chapter 7 is the most common type of bankruptcy. Under Chapter 7, you can eliminate a majority of your unsecured debts by surrendering your available assets.

When you file for Chapter 7 bankruptcy, typically all collection actions against you come to a stop. This means creditors are no longer be able to garnish your wages, call and demand payment or file a lawsuit against you. If your Chapter 7 bankruptcy is approved, you receive a discharge that releases you from personal liability for your debts.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a plan to reorganize and restructure your debts over time. It’s most often used by large businesses, but it can also help individuals and small-business owners. Chapter 11 is a more complicated bankruptcy filing but can be useful if you don’t qualify for Chapter 13. You have four months to come up with a reorganization plan after filing your petition, but this time frame may be extended up to 18 months. When creating your reorganization plan, each creditor is placed into its own class. Unsecured debts are placed in a separate class and never lumped with any other debts.

Chapter 13 Bankruptcy

Chapter 13 is the second most common type of bankruptcy and is primarily filed by individuals. Chapter 13 is
intended to eliminate your debt by creating a repayment plan to pay back your creditors over a three to five-year span. You’ll make monthly payments to a court trustee, and the trustee distributes the money to your creditors. At the end of your plan, the remaining unpaid debts are discharged.

Filing Chapter 13 creates an automatic stay that stops most collection actions, which generally means creditors can’t seek wage garnishments, make calls demanding payment or file lawsuits. Automatic stay can also help protect your home from foreclosure. However, you must continue to pay your mortgage, or your lender can initiate foreclosure proceedings. These are the most common 3 types of bankruptcies but there are others that pertain specifically to certain type of businesses and municipalities.

What happens when you file for bankruptcy?

What happens to your bank accounts when you file for bankruptcy?

You can still maintain your current bank account after you file for bankruptcy, however, the funds in the account may be seized and utilized to pay creditors if they’re not listed as exempt.

What happens to your property when you file for bankruptcy?

This depends on whether you file for Chapter 7 or Chapter 13 bankruptcy.

You can typically keep your property in Chapter 13 bankruptcy.

If you file Chapter 7, you may have to relinquish some property (although many filers keep most, if not all, of their property). This depends on whether your property is considered exempt. If your property serves as collateral for a debt such as your mortgage or car loan, then your property is considered exempt.

What happens to your credit score when you file for bankruptcy?

Filing for bankruptcy can dramatically reduce your credit score and will remain on your record for 7-10 years depending on the chapter. You can immediately begin to rebuild credit once your bankruptcy is finalized. Proper credit utilization, on-time payments and new lines of credit will help get you back in a favorable credit range.

Do you get out of all debts if you declare bankruptcy?

Most debts can be resolved through bankruptcy but there are some that cannot. Some of those include:

  • Unpaid withholding tax, Social Security tax, income taxes, and other back taxes or tax penalties
  • Mortgage debt
  • Debts incurred due to fraud, larceny, embezzlement, or “willful and reckless acts”
  • Debt that doesn’t belong to you
  • New credit card debt incurred within 90 days before you filed for bankruptcy, if it teaches a certain threshold amount
  • Debt owed due to borrowing against certain retirement plans
  • Court fees
  • Child support and alimony

Does bankruptcy clear student loans?

Student loans can be quite difficult to discharge through bankruptcy. It’s only possible if you can demonstrate an undue hardship that is either permanent or expected to last for a majority of the life of the note.

Do I need to take classes?

You’re required to take two credit counseling courses when filing for bankruptcy. These courses will give you useful information regarding the affect’s bankruptcy has on your credit, along with detailed information on how to manage your credit moving forward. The courses are typically either 30 or 60 minutes each and can be completed online or over the phone for your convenience.

Does bankruptcy affect your family?

Bankruptcy filing only has an effect on family if you held a joint asset or debt with the family member. You’ll have an opportunity to list any jointly held debts or assets during your filing and its especially important that you do so.


Bankruptcy and its subsequent affects have played a part in the lives of millions of Americans from the wealthy elite to blue collar workers. It continues to serve as a tool best utilized when a fresh start is the most viable option. Knowing what happens when you file for bankruptcy can help you decide if it’s the right choice for you. While the hit to your credit and possible loss of assets can be disheartening, the results of sticking to a road filled with responsible financial decisions will ultimately lead you to a better and brighter tomorrow.

The Babi Legal Group is driven by the opportunity to help our clients achieve the dream of financial freedom. We are experts in the bankruptcy field and will guide you step by step through the process.

Contact us today for a free consultation!