Bankruptcy can give you a fresh start with your finances. If you decide it makes sense for your unique situation, you should understand what will happen after you file. This can make the entire process less intimidating and set you up for a successful recovery. Below, we’ll dive deep into what happens after you file for bankruptcy, so you know exactly what to expect.
Before filing for bankruptcy
Due to the devastating effect it can have on credit, bankruptcy is a last resort for individuals who are buried in debt. It’s a legal process that can allow you to eliminate or pay back your debts through a court-ordered schedule.
Before you move forward with bankruptcy, it’s important to weigh the pros and cons. Also, consider alternatives to bankruptcy, as you might find a less risky debt relief option that makes more sense for your situation.
What happens after you file bankruptcy?
When you file for bankruptcy, you’ll trigger an automatic stay. This will ensure that creditors and collection agencies won’t contact you during your case to try to collect unsecured debts, such as credit credit debts and medical debts. The automatic stay will also stop wage garnishment, which withholds part of your earnings to repay debt and halts foreclosure.
You’ll attend a 341 creditors meeting where a trustee or the individual who will administer your case will ask you about your assets and debts. You’ll also provide a number of important documents, such as a government-issued ID, bank account statements, pay stubs, and tax returns. While your creditors will be invited to attend, there’s a good chance it’ll just be you and your trustee. Rest assured, the meeting is typically only 5 to 10 minutes long and doesn’t involve a judge.
After your creditors meeting, you’ll have 60 days to complete a debtor education class. The class will teach you how to make good financial decisions, so you can reduce your risk of filing for bankruptcy again. You’ll design a budget, create a strategy for emergency expenses, and learn how to use credit responsibility.
The role of your trustee will depend on the type of bankruptcy you pursue. If you filed for Chapter 7, they will review your assets and oversee the sale of some of them in order to repay your creditors. If you filed for Chapter 13, they’ll oversee your repayment plan and transfer your payments to your creditors.
You can think of your bankruptcy trustee as your guide during bankruptcy. To ensure your case goes as smoothly as possible, it’s your responsibility to provide them with all of the information they need, participate in the creditor meeting, and respond to all of their requests promptly.
What happens after bankruptcy discharge?
After you file Chapter 7 or Chapter 13 bankruptcy, you’ll receive a discharge order from the bankruptcy court. This order will free you from having to repay certain unsecured debts, such as credit card debts, payday loans, lines of credit, medical debts, and personal loans. It also informs creditors that you’re no longer responsible for these debts and requires them to stop all collection efforts.
Keep in mind that some debts may not be discharged in bankruptcy, meaning you’ll still have to pay them back during and after your case. These include alimony, child support, federal student loans, government fines, some retirement plan loans, and certain unpaid taxes.
If you file for Chapter 7 bankruptcy, you can keep your house as long as you’re current on your payments and can continue to make them in the future. With Chapter 13, you may also be able to keep your home as long as you catch up on your missed mortgage payments and stay current on them during your repayment plan.
In the event you lose your home after bankruptcy or never owned one to begin with, you may be able to buy one after your case is over. However, you’ll likely have to wait around one to four years to do so, depending on the type of bankruptcy you filed and the home loan you choose.
Refinancing your home after bankruptcy may be worth exploring as it can allow you to reduce your interest rate, lower your monthly payments, and convert to a fixed-rate mortgage from an adjustable-rate mortgage. The length of time you’ll need to wait to refinance after bankruptcy depends on whether you filed for Chapter 7 or Chapter 13 bankruptcy and the type of mortgage you have. However, you’ll likely need to wait several years before you can begin the process of refinancing. In addition, you’ll need to meet minimum credit requirements and cover closing costs.
Official notice of discharge
Toward the end of your bankruptcy case, you’ll receive an official notice of discharge or discharge letter in the mail. If you file for Chapter 7 bankruptcy, you can expect the discharge notice about three to five months after your filing date. With Chapter 13 bankruptcy, you’ll need to complete a three or five-year repayment plan before your debts get discharged. If you don’t receive the official notice of discharge, consult your trustee.
How do you rebuild your financial health after bankruptcy?
There are a number of ways you can bounce back and steer your finances in the right direction after bankruptcy, including:
- Create a post-bankruptcy budget: A budget is a spending plan based on your income and expenses. It can help you take control of your money and avoid overspending. You can explore several types of budgets, such as the 50/30/20 budget, pay-yourself-first budget, and zero-based budget.
- Establish good financial habits: To avoid going back to square one, make every effort to make smart financial decisions. Build an emergency fund, shop around for the best price, set up automatic savings deposits, and live on less than you earn.
- Rebuild credit: Bankruptcy will stay on your credit report for 10 years if you filed for Chapter 7 and seven years if you filed for Chapter 13. That’s why it’s important to rebuild your credit afterward. Pay your bills on time, avoid debt, open a secured credit card, keep old accounts open, and only apply for new credit when you absolutely need it.
- Correct credit errors: Monitor your credit reports on a regular basis to make sure all of the information on them is accurate. Since errors and inaccuracies can take a toll on your credit, report them as soon as you find them to the right credit bureau. Go to AnnualCreditReport.com to pull free copies of your credit reports.
- Be careful with credit repair scams: It’s not uncommon for those who have filed for bankruptcy to get bombarded with companies that offer credit repair services. If a company approaches you and asks for upfront payment or encourages you not to contact your credit reporting agencies, stay away as they’re likely fraudulent.
- Hold off on big-ticket purchases: After bankruptcy, you may be tempted to buy a new house or car. Since it will be difficult to get approved for a mortgage or car loan, or you’ll have to accept a higher interest rate, it’s in your best interest to wait. Take the time to improve your credit and prove that you’re responsible with money. This way, you’ll increase your chances of getting approved for a loan with a competitive interest rate and favorable terms.
- Keep your bankruptcy paperwork: Even though you might want to throw your official discharge notice and other bankruptcy documents in the trash so you can move on with your life, you should keep them. These documents will come in handy if you decide to apply for financing or a creditor attempts to collect a discharged debt.
Bankruptcy can give you the chance to learn from your mistakes and improve your financial future. By knowing what to expect after you file, you’ll be able to avoid unwanted surprises and increase your chances of a successful case outcome.
If you’re still considering alternatives to bankruptcy, you may be interested in the Home Equity Investment (HEI). With an HEI, you may be able to get up to $500,000 from your home equity to help pay off your debts. An HEI can be an option even if you have less-than-perfect credit, and there are no monthly payments to put additional strain on your cash flow.