What Happens When You File for Bankruptcy?

Quick Answer

Bankruptcy can possibly give your finances a clean slate, but there are negative consequences that can affect your financial and credit situation for years. Knowing what to expect can help you determine whether it's the right move for you.

Man sitting in home office, reading letter and felling worried.

If you're having trouble keeping up with your debt, you may consider bankruptcy as a last resort. Filing for bankruptcy can help you reorganize your debts to make them more affordable or wipe them out quickly after paying off what you can.

Knowing what to expect from the bankruptcy process can help you evaluate whether it's the right decision for you and how it can impact you in the long run.

What Happens When You Declare Bankruptcy?

The bankruptcy process can vary depending on the type of bankruptcy you choose. Here's a quick summary of what to expect.

Chapter 7 Bankruptcy

Also known as liquidation bankruptcy, a Chapter 7 filing involves selling off certain assets and using the proceeds to pay off some of your eligible debts, after which the remaining debt will be canceled.

Before you file for Chapter 7 bankruptcy, you'll need to complete a credit counseling course. At the time of the filing, you'll pay $338 in filing fees. Within 21 to 40 days, there will be a meeting of your creditors to discuss your petition and ask you questions about your situation. Before that, you'll need to provide necessary documents to your court-appointed trustee.

Then, the trustee will liquidate your non-exempt assets and distribute the proceeds to your creditors. Your remaining debt will typically be discharged within four to six months of your filing date.

Chapter 13 bankruptcy

With Chapter 13 bankruptcy, the court will help you reorganize your debts in a way so that you can afford to pay off some or all of what you owe over the course of three to five years. As with Chapter 7 bankruptcy, you'll need to complete a credit counseling course before you can file.

When you're ready to file, you'll pay fees amounting to $313. You'll also need to start making plan payments within the first 30 days, even if your petition hasn't been approved yet. You'll also need to provide necessary documents to your trustee before the meeting of creditors, which occurs within 21 to 50 days after you file.

Within 45 days after the creditors meeting, you'll attend a confirmation hearing to find out if your proposed repayment plan is approved or denied. Depending on your situation, your plan will last three to five years, after which any remaining debt will be discharged.

What Debts Can Be Discharged in Bankruptcy?

Most forms of consumer debt can be included in a bankruptcy filing, including:

  • Unsecured and secured loans and credit cards
  • Medical bills
  • Collection accounts
  • Business debts
  • Private loans owed to a family member or friend
  • Past-due utility payments
  • Back rent

However, there are a handful of debts that cannot be discharged in a bankruptcy proceeding. Examples include:

  • Debts not declared in your filing
  • Alimony and child support
  • Certain types of tax debt
  • Government fines and penalties (like for restitution from a court case)
  • Government-funded or guaranteed loans
  • Retirement plan loans
  • Debts for willful and malicious injuries to people or property

While it's technically possible to get student loan debt discharged in bankruptcy, it can be challenging to get it approved.

Will I Lose My Property if I File for Bankruptcy?

Chapter 13 bankruptcy typically won't require you to get rid of your personal assets because the goal is to pay off some or all of what you owe over time. If you file for Chapter 7 bankruptcy, though, you'll typically need to sell off some of your assets to satisfy at least a portion of what you owe.

That said, state laws determine that some assets, such as your retirement accounts, house and car, are exempt from liquidation. Check with a bankruptcy attorney in your state to find out what property you would be allowed to keep.

What Happens to My Credit if I Declare Bankruptcy?

When you declare bankruptcy, it's a sign that you are no longer paying your debts as originally agreed. As a result, it can seriously damage your credit history for several years to come.

  • Chapter 7: Because Chapter 7 bankruptcy typically eliminates a large portion of your debt within months of your filing, it will remain on your credit reports for 10 years after your filing date.
  • Chapter 13: Chapter 13 bankruptcy is viewed more favorably because you're likely paying off a good chunk of your debt. As a result, it will remain on your credit report for seven years from the filing date.

Keep in mind that while a bankruptcy will stay on your credit reports for several years, its impact can diminish over time, especially if you take steps to rebuild your credit after bankruptcy.

Are Bankruptcy Filings Publicly Available?

Bankruptcies are considered a public record, but that doesn't mean everyone's going to know about it. Bankruptcy cases are filed in a system called Public Access to Court Electronic Records (PACER).

Anyone can register for PACER and access case information. While the service technically charges $0.10 per page, there's a $3 limit for a single document, and if your total charges don't reach $30 in a quarter, the fees are waived.

Another way people might find out about your bankruptcy is if your local newspaper publishes public notices.

Finally, employers, landlords and creditors may be able to see on your credit report that you've filed bankruptcy when you apply for a job, an apartment lease, a loan or credit card.

Will Bankruptcy Affect My Job or Future Employment?

An employer can find out about a recent bankruptcy if it runs a federal bankruptcy search or a credit check. In many cases, the public record won't impact your candidacy for a job. However, if the position involves direct access to financial information or government security clearance, it can be a deal-breaker.

It's less likely that employers would conduct background checks on current employees, though, and they need your permission to do it. So if you're not planning to switch jobs, you likely don't need to worry much about a bankruptcy affecting your employment.

Monitor Your Credit Throughout the Process

Because declaring bankruptcy can affect your credit history and ability to do certain things in the future, it's important to monitor your credit scores during the process and as you work on recovering from the ordeal.

Doing so can help you better understand how certain actions affect your credit scores and also give you some insights into how you can improve your credit after your bankruptcy is discharged.