What to Expect During Bankruptcy

Choosing the right path for a personal bankruptcy filing.

Choosing the right path when you file for bankruptcy

Let’s be honest – bankruptcy is never easy. But the better prepared you are for what’s to come, the easier it will be to work through the process.

What’s more, knowing what to expect when you file can help make the road ahead easier as you wait to get your final judgment. With a solid understanding of what’s to come, you can prepare yourself and your finances as much as possible.

Fact: Personal bankruptcy can take anywhere from 90 days to five years, depending on the type of filing

Here is what you can expect once you file…

Two paths through the bankruptcy process

You have two options when you declare bankruptcy.

  • Chapter 7 bankruptcy discharges your debts by liquidating your assets. This means you may have to give up your home, car and other assets like art, antiques, or businesses in order to settle your case.
  • In Chapter 13 bankruptcy, you are required to pay back at least a portion of your debts on a court-ordered payment schedule. However, on a high note, your assets are safe. So you can go bankrupt without losing your home.

A snapshot of the filing process

It’s always recommended to get a bankruptcy attorney. The paperwork isn’t actually that hard to file, but the process itself can be tricky and you want to have a legal expert on your side to make sure everything is going smoothly.

Once your case is filed, a trustee will be assigned to review the paperwork and your debts in a “means test” to make sure you’re not committing fraud. Stipulations under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) provide banks and creditors with a way to protect themselves from fraudulent practices.

That may sound a little scary, but really, as long as you’re not gaming the system – like running up a bunch of debt on new credit cards right before you file – you should be fine. Really, the means test will just confirm if you’re eligible for bankruptcy and which type you should file.

Fact: The means test was challenged after Hurricane Katrina, when many people above the poverty line were forced to legitimately file due to extreme circumstances.

Things to know as you file

Think bankruptcy is a free ticket to a fresh start when you’ve messed up? Not really. You need to know…

  • Not all of your debts are wiped out with bankruptcy. Things like court-ordered child support and alimony can’t be discharged. Tax debt and federal student loans are usually not dischargeable.
  • You must list all of your debts in your filing. In some cases, people try to keep one or two debts out with the intent that once the bankruptcy is final, they can at least pay that debt back. If you have reasons you want to pay a particular debt, your attorney can enter a reaffirmation agreement on your behalf.
  • You can be held responsible for recently incurred debts. Most of the BAPCPA guidelines focus on preventing people from racking up debt just prior to filing. If you go out on one last shopping spree on your credit cards before you file, your creditor can move that these are fraudulent charges. In that case, the debts can’t be discharged. Even worse, your entire bankruptcy case can get thrown out.
  • You won’t lose the shirt off your back. While bankruptcy law varies from state to state, every state has exemptions in what can and can’t be taken. Clothes and household goods are almost always protected. Your car and even a home (up to a certain value) may also be protected. Qualified retirement plans (IRA/401(k)) are typically safe, too.

Pop Quiz

How many years is your credit penalized when you file for bankruptcy?

a) 7 years for Chapter 7 and 13 years for Chapter 13

b) 7 years for Chapter 7 and Chapter 13

c) 7 years for Chapter 13, 10 years for Chapter 7

d) 10 years for Chapter 7 and Chapter 13

Reveal Answer

Chapter 13 has the shorter penalty at 7 years and Chapter 7 applies for 10 years. In both cases, the “weight” of the penalty decreases over time.

c) 7 years for Chapter 13, 10 years for Chapter 7

Return to question

What bankruptcy can do to help you

Bankruptcy isn’t a free ride, but it’s also not the end of your financial world. In truth if you file correctly, it can help you hold on to some of your most valuable assets and get a fresh start at the same time.

You just need to be smart about it, file when it’s time to put a period on things, and hire a good attorney. Not convinced?

Assets timely bankruptcy filing can help protect:

  • Your IRA and 401(k) are both typically protected in bankruptcy
  • Any 529 college savings plan is usually protected
  • In some cases, you can even save your home from foreclosure in a bankruptcy decree, depending on where you live
  • The same is true for your car loan
  • Bankruptcy stops wage garnishment
  • In most cases it can also stop a pending lawsuit on your debt