What Happens When You Declare Bankruptcy?

By Daniel Gruttadaro
Bankruptcy can be a last resort for consumers facing financial difficulty.

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Individuals facing financial difficulties can obtain certain types of relief by filing for bankruptcy. Creditors will also have their interests protected during the case. There are many different types of bankruptcy but certain cornerstones of bankruptcy law--such as the automatic stay, the discharge, and the post bankruptcy effects--are common to all bankruptcies.

Types of Bankruptcy

Consumers generally will choose between Chapter 13 and Chapter 7. A Chapter 7 is a liquidation bankruptcy in which the debtor's non-exempt property is pooled and sold and the proceeds are used to pay creditors a pro rata share. A Chapter 13 bankruptcy is a type of bankruptcy for debtors who have a source of income; it allows them to retain certain non-exempt property in exchange for paying back creditors from future earnings.

Exemptions

Exemptions are an important part of bankruptcy. Each state has certain property which is considered exempt, meaning it cannot be touched by creditors or by the bankruptcy trustee. This property generally consists of basics needed to survive, such as clothing, food, home and autos. Some states place a maximum dollar amount on the value of property being exempted.

Automatic Stay

As part of the bankruptcy petition a list of all a debtor's creditors is filed. As soon as the case is filed, creditors are notified. Legally, as soon as a case is filed the automatic stay prevents any collection attempts by creditors. This allows debtors time to reorganize; creditors must wait to obtain their fair share of what the debtor ultimately pays.

Time Frame

Cases vary in the amount of time they take and how complex the procedures will be. Certain steps, such as obtaining pre- and post-petition credit counseling, must occur in all types of cases. Other steps like the filing of a plan are specific to certain chapters. A Chapter 13 case takes longer to complete than a Chapter 7.

Discharge

The discharge occurs after the successful completion of a bankruptcy case. After the discharge a debtor has a fresh start. Discharged debts can not be collected in the future after the discharge.

Post Bankruptcy

After bankruptcy the debtor has a sort of financial rebirth. A consumer will be free from the debts that forced him into bankruptcy in the first place. The bankruptcy will remain on the credit report for seven to 10 years, so credit will have to be reestablished. This can be accomplished by using credit sparingly and responsibly. Another effect is that future employers and lenders may ask if a person has ever filed bankruptcy.

About the Author

Daniel Gruttadaro began writing professionally in 2009. His work appears on Web sites including eHow and Answerbag. Gruttadaro is a licensed attorney in New York. He holds a Juris Doctor from the State University of New York at Buffalo School of Law.

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