What Happens When You File for Bankruptcy?
Any consumer bankruptcy follows a general bankruptcy process. You can expect the same bankruptcy timeline that includes:
Gathering paperwork and bankruptcy forms
Filing the bankruptcy petition
Meeting with your bankruptcy trustee at the creditors’ meeting
Debt relief through unsecured debt discharge
Chapter 7 and Chapter 13 are the two types of consumer bankruptcy — if your business is considering bankruptcy, then you should learn more about business-related bankruptcy.
Step 1: Consider the Types of Bankruptcy
The types of debt you are facing can determine which bankruptcy filing is right for you:
Do you need more time to pay back the debt? Chapter 13 bankruptcy stops creditor harassment and gives you a repayment plan.
Do you want credit card debt or medical bills dismissed? Chapter 7 bankruptcy discharges all unsecured debt to give you a fresh start. You must meet the Means Test to qualify for Chapter 7.
A bankruptcy attorney can help you review your debt and assets, bankruptcy laws, and the likely outcome of your bankruptcy case. When in doubt, seek professional legal help to decide how to proceed.
Step 2: Take Your First Credit Counseling Class
You are required to take a bankruptcy credit counseling course before you file. These classes are intended to help you stay out of future debt and avoid filing for bankruptcy again.
Step 3: Create a Statement of Intention
You will be required to fill out a Statement of Intention form for Chapter 7 bankruptcy. This details your intentions with your secured debt — usually property like real estate or your car. You can reaffirm the debt, surrender the property to pay off your debt, or pay off the remaining loan with a Motion to Redeem. If you filed a Chapter 13 bankruptcy, then you will keep your property and pay it off in the repayment plan.
Your home and car may be exempt from bankruptcy under your Utah’s bankruptcy exemptions. This means your bankruptcy trustee cannot take these assets and sell them to pay back your debt. A bankruptcy lawyer can help you understand your options to keep your home or vehicle.
Step 4: File Bankruptcy
You will file for bankruptcy in your local bankruptcy court. This involves filling out forms and providing documents to verify your information and income. The court will give you a case number and assign a bankruptcy trustee to oversee your case.
Filing bankruptcy should immediately stop all creditors from calling or harassing you. This is called an “automatic stay.” If you are still getting calls, tell your attorney, because they are breaking the law.
Unfortunately, your credit score will take a dramatic hit once the bankruptcy filing is approved. You will likely drop to a low credit score whether you had excellent credit or not. Your credit cards will also likely be shut down by each company, so you need to apply for new secured or prepaid credit cards.
Step 5: Pay a Filing Fee
Filing for bankruptcy always comes with a fee that you need to pay upfront or in installments. It varies by state, but you can expect around $300 for a Chapter 7 or Chapter 13 bankruptcy. If you cannot pay the fee right away, you have 120 days to pay the full amount.
You can apply to the bankruptcy court to make four payments. If approved, you will receive a court order listing the dates each payment is due. You cannot be late or miss these dates. Your entire bankruptcy case can be dismissed if you do not make these payments on time. In some cases, you can apply for a fee waiver and file for free.
Once you have successfully filed, the bankruptcy proceedings will begin.
Step 6: Prepare for Your Meeting of Creditors
The bankruptcy trustee you were assigned will give you a list of documents to bring to your meeting. You should be prepared to bring:
Social Security card
Any other documents requested by the trustee
You need to provide information and documents as soon as possible. The trustee should give you a timeframe, and you need to comply with any “reasonable requests” they ask. Your case could be dismissed if you refuse information or miss the document timelines.
Step 7: Attend the Meeting of Creditors
The meeting of creditors invites your creditors to attend and discuss your bankruptcy paperwork. Most of the time they do not show up. The meeting can also be referred to as a “341 hearing.”
In most cases, it will be just you and your bankruptcy trustee — no judge or courtroom is involved. It is a short meeting (around ten minutes) to discuss your paperwork and decide if you are eligible for a Chapter 7 discharge of current debt.
Once this meeting ends, you may have more documents to send in, such as your tax return for the year. Aside from that, the trustee will send your creditors the correct documents about your bankruptcy, and you likely won’t have to see your trustee again.
Step 8: Take Your Second Credit Counseling Class
Once your case is approved, you must take a second course on financial management. You have 60 days to complete the second class and file a certificate of completion with the bankruptcy court. The 60-day time limit starts on the day of the creditor meeting.
Step 9: Rebuild Credit Over 1-2 Years
A Chapter 7 bankruptcy will be on your credit report history for ten years, and a Chapter 13 bankruptcy remains for seven years (if you complete the payment plan). You can start rebuilding your credit as soon as the bankruptcy discharge is approved. With careful steps and debt management, you can have a better credit score in one to two years after filing bankruptcy.
To rebuild credit, you can get a secured credit card or a prepaid card. These can be useful to keep new debt low while making on-time payments to rebuild your financial situation.
If you decided to keep your house or car, be sure to pay your car loan, mortgage, or rent payments on time.
Step 10: Make Any Needed Changes
If anything changes during your bankruptcy, you need to file an amendment with your bankruptcy court. The same is true if you made a mistake or uncovered missed information. If you lie on these forms, you can face charges of perjury.
Using debt relief tactics is an option before filing for bankruptcy.
There are several legal and financial routes you can take, and you have some legal protections as you try paying down debts. If you are worried and financially troubled with massive debt or student loans, learning about debt relief could be the right option for you.
It can also be a good idea to learn your rights under debt collection laws at this time. This can be a tricky field to navigate, and companies often try to take advantage of worried consumers facing debt.
Remember: No matter your total debt; you have rights against debt collector harassment as you work toward being debt-free.
What Is Debt Relief?
Debt relief is any structured plan to pay down your overall debt amount. These options can be undertaken yourself or with professional help and can include:
Repayment plans or programs
Debt Management Plans (DMP)
Credit counseling services
Creating and sticking to a budget
Creating a personal plan to pay down debt
Debt negotiations (handled personally or by a professional company)
Refinancing debts (such as a mortgage or loan)
What Are Other Options for Debt Relief?
An attorney can help you decide which options are right for you. Bankruptcy is one legal option to deal with financial problems. An attorney can review your situation and tell you if a Chapter 7 or Chapter 13 bankruptcy is the best way forward.
If your debt is not making everyday survival hard, you may want to consider debt relief before filing bankruptcy. If your debt is beyond controlling on your own, you can discharge most debts in Chapter 7 bankruptcy or pay them back with a clean slate in Chapter 13.
Are There Any Programs for Debt Relief?
For those who are deep in debt, you might consider debt relief programs. One example is consumer credit counseling to:
Educate yourself on debt
Ask bigger-picture financial questions
Learn to manage day-to-day cash flow challenges
Several debt counseling organizations are classified as “nonprofit,” but that does not necessarily mean they offer free, affordable, or even legitimate services. There are many credit counselors and debt consolidation agencies that claim to help consumers reduce their debt. Unfortunately, some of these counselors are scammers. To protect yourself, use an agency listed on the DOJ’s list of approved credit counseling agencies. You can also ask a local bankruptcy or consumer rights attorney for recommendations.
Don’t Know Where to Start? Review Your Finances First
Before picking a debt relief option, you’ll need to know how much you can afford to put toward your debt each month. Review your past expenses to find out how much you need to live on.
Be sure to leave enough for daily necessities like food and gas. Once you have a real idea of your debt and expenses, you’ll be able to determine exactly how much you can put toward your debt.
If you still need some time to figure out how to best use your “debt payment money,” consider setting up a separate saving account so you won’t be tempted to use it on other things.
Making a Budget
If you’re working on cutting down your debt, making a budget is an essential first step. Creating and sticking to a budget is also an important way to avoid debt in the first place.
By mapping out your regular expenses, you can get a clear picture of your finances and act accordingly.
You can consider:
Prioritizing your debts
Reviewing your income vs. expenses
Planning ahead for holidays on a budget
Reducing and managing your expenses
Avoiding excessive spending
Refinancing your loans
Carefully Consider Which Debt to Pay Off First
If you choose not to file for bankruptcy, you will be paying off your debt by yourself or with other debt-relief options. The decision to pay down your debt is a great first step toward getting your finances under control.
One of the most common questions people ask themselves when they decide to tackle their debt is, “Where do I start?” Of course, all financial situations are different, making that question difficult to answer in simple terms.
Some possible ways to handle debt include:
Knowing what kind of debt you’re dealing with
Figuring out what will give you the most significant boost (such as paying your highest-rate bad debt first)
Considering the effect on your credit score
Recommended order for paying off debts
Know What Kind of Debt You Are Dealing With
You need to identify the types of debts you have and the consequences of defaulting on them. Most “consumer debts” typically fit into one of these broad categories:
Secured Debt: The lenders for secured debts have an ownership interest in your property. The most common types of secured debts are mortgages and car loans. When you can’t keep up with payments, the lender can repossess the collateral property.
Back Child Support: Every state has a different enforcement policy, but failing to pay child support almost always has serious consequences. Child support rarely gets reduced, although many states will modify monthly payments or create unique payment plans.
Back Taxes: Tax collection agencies take tax debt seriously and often charge huge interest rates on unpaid taxes. You can sometimes work out payment plans to pay down tax debt.
Student Loans: Many student loans offer flexible repayment options.
Back Utility Payments: Many utility companies will tolerate two or three missed payments, but the company may cut you off if too many are missed.
Unsecured Debt: This category includes almost every other kind of debt, such as credit cards, medical bills, and personal loans. Lenders may increase your interest rates, charge late fees, or simply sue the delinquent borrowers. Unlike secured debts, unsecured debts aren’t secured by property, meaning lenders have nothing to repossess should you fail to repay the debt.
Carefully review the penalties for not paying these debts. While debt is not a good thing, you sometimes need to choose which debts are the most serious and have the worst consequences and tackle the rest later.
Figure Out Which Debts Will Give You the Best Boost
Debts often grow at different rates and have different consequences for missing payments (“defaulting”). For example, throwing your limited cash at the wrong debt can put you in deeper debt. Debt can get worse due to the interest and penalties that may accrue on your other loans.
Take the time to seriously consider — and calculate — how you want to pay down your debts, including:
Paying on loans for everyday necessities
Fulfilling your legal obligations
Starting with high-interest-rate debts
Paying your deferred loans
You can find a recommended order for paying off debts below:
1. Pay for Necessities
Many borrowers have fallen behind on their mortgage payments, car loans, or utility payments. If you miss too many of these payments, the creditors can foreclose on your house, repossess your cars, or shut off your utilities.
However, most of these loans have lower interest rates than other types of consumer debt, such as credit cards. This means that your “debt load” on these loans will grow at a slower rate than that of your credit card debt.
As a result, many bankruptcy and consumer debt attorneys advise making the minimum payments necessary to keep your house and car, and keep utilities on while working on other debts.
Borrowers can often negotiate with banks to work out a new payment schedule or reduce the loan’s total amount. Of course, if you are current on these debts or have already worked out an alternate payment schedule, it’s best to stay on course.
If you are far behind on payments, some creditors or lenders will choose not to apply your new payments to the debt. If you think this is happening to you, you should speak with an attorney right away. You want payments to apply to the debt, not to new money owed.
You may also want to consider setting up a separate savings account to keep your payments in until you are sure the money will be applied correctly.
2. Fulfill Your Legal Obligations
Once your day-to-day debt has a plan, think about the money you legally owe others.
Child support and tax payments are serious obligations. These are rarely discharged in bankruptcy, so you will face these debts no matter what option you choose. Fortunately, most child support and tax collection agencies are willing to work with you to create a payment plan that fits your budget. If you have a payment plan worked out, be sure to follow it exactly.
Failure to make tax or child support payments can have devastating consequences, including:
Raised interest rates on your debt
Wage garnishment (taking money from your paycheck before you get it)
You need to carefully consider each creditor’s claims.
3. Pay off Debts Starting With the Highest Interest Rate
Now that you’ve made sure you can stay in your house and take care of your legal obligations, you can work on paying down the rest of your debt.
For many people, the largest part of their debt burden is made up of credit card debt. This type of debt typically carries an interest rate between 20% and 30%. As a result, most credit card debt is often made up of late fees and accrued interest, rather than the cash borrowed. The banks that issued the credit cards can significantly reduce your credit card debt and avoid suffering any actual loss. In such cases, the banks typically require you to make a lump-sum payment. Agreeing to this reduction may have tax consequences.
If you don’t have the cash on hand to make these lump-sum payments, simply pick the loan or credit card with the highest interest rate and put as much money as you can toward that debt. Once that debt is paid off, cancel the card and move on to the loan with the next highest interest rate.
You may also consider combining your loans with a debt relief option. This involves taking out yet another loan, using it to pay off your existing debt, and then paying the consolidation loan off over time.
Many borrowers prefer this option since it’s often easy to find a loan with a better overall interest rate. Also, having to keep track of only one loan instead of several is a relief for many debtors.
4. Pay Your Deferred Loans
Finally, most student loans allow you to defer payments if you are in difficult financial times. The loan will still accrue interest while in deferral, but usually, the interest rate is lower than those of other types of debts.
Once the rest of your debt is under control and you have a steady income, you can resume payments on your deferred loans.