What Happens When You File For Bankruptcy?

An Insider's Perspective

What Happens When You File For Bankruptcy?
November 7, 2013

Bankruptcy — this word used to strike fear, desperation, and a sense of failure in the hearts of those who may be down to their last option. In an economic environment such as today’s, there are thousands of reasons why families may have put themselves into situations in which the only way out from under a crushing mountain of debt is to file for bankruptcy.

The reasons themselves are somewhat irrelevant, since what gets us into these situations isn’t really the issue. Rather, we need to do what’s best for ourselves and our families to make sure we have a brighter future. This is what investing, saving, and money management is all about, right? If your future is looking bleak from a financial perspective, shouldn’t you be looking at ALL of your options?

What is bankruptcy?

Simply put, bankruptcy is legal protection for an individual or a business which needs to be done through the court system that prevents creditors from taking legal action. There are several “types” of bankruptcies, but the two most common are Chapter 7 bankruptcies, which simply wipe out all of your debts, and Chapter 13 bankruptcies, which give you time to repay all or part of your debts without fear of legal action.

Chapter 7 bankruptcies are the “fresh starts” that people often need to reboot their financial situations. During the legal process, those with assets might be required to liquidate those assets to pay back some debts. Others who have very few assets (making the liquidation process useless) can get that clean slate they’re looking for. There are many rules and stipulations that a filer will be required to meet to qualify for this type of bankruptcy, which your attorney will help you navigate. For the purposes of this article, we will focus on Chapter 7 bankruptcies since they are the most common for individuals.

To summarize, Chapter 7 bankruptcies are ideal for those who have a great deal of unsecured debt and limited assets who are having continued issues making payments and find that there is no light at the end of the tunnel. Individuals who are either facing a foreclosure or dealing with creditor calls due to late payments can definitely benefit from this protection. You must remember that credit card companies and anyone else you owe money to have a legal right to that money. Some people take the risk of simply not paying their debts, but there comes a tipping point when the cost of taking you to court to recoup some of those funds is less than that of the debt. In short, unless you have bankruptcy protection, you are always at risk of a knock on the door with a summons to appear in court for your debts — and this is not a cloud under which many people enjoy living.

How to view bankruptcy as a fresh start

Now, let’s discuss the psychological effects of filing for bankruptcy. Having gone through a bankruptcy myself and also having helped a family member go through the process, I know that the emotional impact of a bankruptcy can be difficult unless you put yourself in the right mindset!

As I mentioned before, a sense of fear, desperation, and failure are all part of the emotional roller coaster of a bankruptcy. Everyone wants to pay their bills. When the time comes that you no longer can, it’s a helpless feeling. You might find yourself at the point where your credit cards are maxed out, you are a month or two behind on your rent or mortgage, or you are getting calls from your cell phone company threatening to turn off your phones. There is no question that this is stressful! Nevertheless, you need to ask yourself, unless you get that lottery win, how exactly is all of this going to change? What if one more major expense pops up? In my case, I had an SUV with a ridiculous number of miles on it. It terrified me to think about what I would do if the transmission went out. Where exactly would I come up with $3000 to $5000 to fix it?

In my situation, it came to the point for both my wife and me that we had to bite the bullet and file for bankruptcy to get out from under the cloud under which we found ourselves living. Although it was difficult, we got ourselves into a mindset of viewing it as an opportunity for a fresh start. Honestly, that’s exactly what bankruptcy is all about — it’s a means to get you out from under a cloud of worry and stress and simply start over. Of course, I felt a sense of failure for a while, but once you go through the process and your debts are swept away, the feeling of freedom and the ability to look ahead hopefully once again far outweigh the negative feelings you may have had during the process.

Choosing an attorney

First, you need to find the right bankruptcy attorney. You definitely need to find a bankruptcy attorney with whom you are comfortable. If your situation is simple and straightforward, then pretty much anyone can help you, as it’s a pretty standard process. However, if yours might be complicated, you will want to take some extra time to make sure you have an attorney who is comfortable with being thrown a curve ball. For example, if you have a number of assets (e.g., coin collections, artwork, boats, multiple cars), then things may become somewhat more complicated. Additionally, if you’re including a business as part of your bankruptcy, your attorney needs to have an understanding of your situation well in advance of signing on the dotted line. If things are straightforward for you (e.g., no investments, mostly credit card debt, no private island in the Caribbean), then the process will go more smoothly.

Asking the important questions

Second, do not be afraid to ask detailed questions about the process. Each state has its own set of rules, and you need to be aware of those differences. Do not take the word of a friend or family member who went through a bankruptcy in Florida if you live in Wisconsin. Any attorney you hire must be willing to take the time to answer your detailed questions to the best of his/her ability prior to signing. The fees associated with a bankruptcy can also vary widely from firm to firm, so make sure you do your research and understand everything that will be involved. Be straightforward with your attorney and ensure that s/he is the same with you. Now is not the time for kid gloves, so be sure to get all of your questions answered. If you’re not satisfied, there’s always another attorney you can call. Remember, this is going to be a stressful situation for a few months, so you had best be comfortable with your attorney or the process will be a difficult one.

Getting your paperwork in order

The next step is the always entertaining piles of paperwork. You will find yourself poring over credit reports, bank statements, investment portfolios, expenses, and budgets to give your attorney a complete picture of where you are and the debts you have incurred. This is the most important phase, as it gives you the opportunity to carefully examine all of your income and debts to make sure everything is included.

Filing your case

Once all of the documentation, paperwork, and information are provided to your attorney, s/he will be able to make an official determination of the chapter of bankruptcy for which you will be able to file (Chapter 7 or 13). When your attorney is satisfied that all of the information is in order, s/he will create and file your case. Be aware that this process could take several weeks. There is a lot of information that needs to be reviewed, so don’t expect your case to be filed overnight.

Slowing the calls from creditors

The good news here is that once you retain your attorney, you have something to tell the creditors who have been calling you. Even before the case is filed, you can inform collectors that you’ve retained a bankruptcy attorney and that all questions should be directed to him or her. Once you give them your attorney’s number, they will probably stop calling you, although legally, they have the right to continue calling until a case is filed and a case number has been assigned. This is a good step in the right direction, though, because the annoying calls will at least diminish in frequency.

At this point, the case has been filed in the courts and you have an official case number. There might be a few lingering calls while the notices are being mailed, but once you tell a creditor that you have a case number and to contact your attorney, it is now officially illegal for any creditor to contact you. This is a cause for celebration.

Meeting of creditors

From this point, each state has a different process. However, typically there will be a meeting of creditors with a court representative that’s held at some point between four to eight weeks (depending on the court systems in your state). You will meet with your attorney at this meeting to answer questions from a State-appointed arbitrator, who will ask simple questions about your filing, such as, “Have you ever filed for bankruptcy before?” or “Are you expecting any unusually large incomes in the next six months?”

This meeting is primarily to give your creditors an opportunity to make a claim to any assets you may have. In most straightforward cases, credit card companies will not bother sending a representative to make a claim. In short, it’s one of those “speak now or forever hold your peace” moments when the arbitrator asks if there is anyone at the hearing making a claim against your assets.

Finalizing your case

Assuming all goes well and no one is there, your bankruptcy process is nearing completion. Once the meeting of creditors is over and no one has made any claims, it’s simply a waiting game until the bankruptcy is complete and you receive your discharge letter stating that all of your debts are now discharged and you’re free and clear. At this point, you’re done and ready to move forward with your financial goals for the future knowing that you are off the hook with all of your past creditors.

Moving on

When this day arrives, as I mentioned before, you will find that the stress and strain of the past few months will melt away because you know that you’re ready to move forward. Now is your chance to rebuild your credit and your credit scores. If you do things right, you will find that even though your bankruptcy filing will be on your credit report for years to come, you can start improving your credit score right away. In just a year or two, with on-time payments to new debt and a clean history, your credit scores might even be higher than they were pre-bankruptcy!

In summary, you have a financial and emotional choice to make. As with any investment or financial decision, you must look at it rationally and determine the best long-term approach for you and your family. Often, bankruptcy will be your best option, and in such cases, you should not shy away from it. When actors, actresses, sports stars, and business moguls have sought out the protection of filing for bankruptcy, why on Earth should you feel that it’s not an option for you? Sure, it’s probably not something you’ll post on Facebook or write about in your blog to share with the world — but you don’t do that with your finances anyway. The stigma of bankruptcy is a thing of the past. In an extremely difficult economic environment, it’s important to examine all of your options to secure a bright future for your family.

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