How Bankruptcy Works

If you have decided to file bankruptcy, or even if you're just considering the idea, you probably have a lot of questions. There is a lot of incorrect information floating around that can actually make bankruptcy seem like something it isn't, and many people get an entirely different impression based on that information. The truth is that bankruptcy is relatively straightforward with clearly defined risks and benefits; all you need to do is find an attorney you can trust and follow some basic instructions. Read on to find out more about how bankruptcy works!

Types of Bankruptcy

While there are several types of bankruptcy, if you are an individual or part of a couple jointly filing, there are only two options available to you. These types are called Chapters, and they are two very different ways to reach the same goal of financial freedom and debt relief. Chapter 13, which is a type of consolidation rather than erasure, works by examining your monthly expenses and letting you pay one monthly payment to a trustee, who them distributes that money to your secured creditors. Instead of expecting you to pay an inordinate amount of money each month, your payments are based on your income and budget. Chapter 7, on the other hand, is much more erasure-oriented. In exchange for asset liquidation, you can erase most of your debt and start over. Chapter 7 is more risky than Chapter 13, and is a good idea if you do not own many assets or do not have a stable income.

The Process

Once you have found an attorney you trust, you will be expected to gather several items of importance: paystubs, tax information and returns, a monthly budget, a list of assets, and other things your attorney deems relevant. It is important to be prompt and honest in this stage; the sooner you submit the full, accurate information, the sooner you can continue with the process. The act of filing for bankruptcy initiates an automatic stay, which is essentially a cease and desist notice for your creditors; they cannot contact you or otherwise harass you in any way. This gives you the freedom to breathe a sigh of relief and focus on finishing the process. You will be expected to meet with your creditors during the process, fill out paperwork, and appear in court, but with the help of your attorney it needs not be difficult.

Effects of Filing

There are consequences, both positive and negative, to filing for bankruptcy. Depending on the type of bankruptcy you choose, these consequences will affect you in different ways. You may have heard that a bankruptcy will stay on your credit report for years; this is true, but that in itself is not terribly destructive. In fact, avoiding filing when you need it will ruin your credit in a way that bankruptcy never will. Additionally, you have probably heard that bankruptcy will cause you to lose your home, your car, or both. This is a risk carried by filing a 7, not a 13, and even then the risk is negligible, as there are certain exemptions for necessities like houses and vehicles for which most people qualify. In reality, bankruptcy has many more positive consequences, including less stress, financial freedom, and in most cases, a chance to start over financially. This will make your life better physically, mentally, emotionally, and socially; it really is relief from debt!

Legality and Responsibility

It may interest you to learn that bankruptcy is actually a legal right that everyone has. You may have heard someone, or a few someones, say that it is "cheating the system" or "taking a free pass," but this is simply not true. Bankruptcy is part of "the system" and a valid way to protect yourself from overwhelming or unmanageable debt. The term "free pass" implies that there are no consequences and that your debt will disappear completely, but there are consequences to filing bankruptcy; they just aren't as bad as the consequences of running from and avoiding debt. Ultimately, bankruptcy can be one of the smartest and most responsible decisions you can make, and you have a right and a responsibility to take care of yourself.

"I was worried I would lose everything. Brian helped me sort things out and restored my life. I don't know where I'd be without him!"

-Sue H. Ogden, UT