What happens if you declare bankruptcy?

52725917 - documents for filing bankruptcy chapter 7‘Bankruptcy’ is a term that gets thrown around in the media when a big company or celebrity files a case. However, bankruptcy claims are issued more often than you might think. In 2019 alone, roughly 752,160 bankruptcy cases were filed by individuals compared to just 22,780 for businesses.

Having large debts with no means of repaying can be a struggle, as creditors keep bombarding you with calls to pay back while you’re living from paycheck to paycheck. Moreover, one unexpected event like a medical emergency can send you to financial ruins. Bankruptcy is often a last resort to get this financial burden off your shoulders and get a fresh start.

If you’re considering declaring bankruptcy, this post will explore things you need to know before you file.

What is Bankruptcy?

Bankruptcy is a court proceeding that involves a person or an entity unable to repay their outstanding debt to creditors, seeking to get relief from some or all of their debts. After the debtor files a petition, the judge and court trustees evaluate the assets and liabilities of the debtor. The court then decides which assets may be used to repay a fraction of the outstanding debt, if any.

When you declare bankruptcy, an automatic stay is granted. What this does is essentially shield you from creditors as they can no longer legally collect their debt. Your bank account, garnish wages, and every other exempt asset are off-limits.

Types of Bankruptcy

The type of bankruptcy you file will affect how your debts are handled. While there are several types of bankruptcy, only three are the most common. They include:

Chapter 7

Chapter 7 bankruptcy is the simplest and most prevalent type. It is typically filed by individuals with few or no assets. It allows you to dispose of unsecured debts like medical bills and credit card balances. However, nonexempt assets like second homes, high valuation items, stock, bond, and cash must be liquidated to repay a portion of the unsecured debt. That’s why this type of bankruptcy is commonly referred to as ‘liquidation bankruptcy’.

State laws determine that some assets like your first house, only car, or any other essentials are exempt from liquidation. You can find out what items you’re eligible to keep from a local bankruptcy attorney.

Chapter 13

Individuals with too much money for Chapter 7 bankruptcy may file under Chapter 13. It is commonly referred to as a ‘wage earner’s plan’. It enables the individual to create a viable debt repayment plan over an extended period, which is typically between 3 to 5 years. This option only makes sense for individuals with a consistent income stream.

In exchange for settling your creditors, you get to keep all your assets, including nonexempt property.

Chapter 11

Just think of Chapter 11 bankruptcy as a variant of Chapter 13 bankruptcy specifically for businesses. The objective is usually to relieve financial burden temporarily, reorganize their business, and return to profitability.

Things to Note About The Bankruptcy Process

It’s not free

Ironically bankruptcy is not free. The filing fee for chapters 7 and 13 costs anywhere from $300 to $350. Although the fee may be waived if you prove that you cannot afford it.

Furthermore, you have to pay the attorney fees. While you can file for bankruptcy yourself, it is not advisable because bankruptcy laws are convoluted and you need someone with a deep understanding to give you the best winning chance.

The average fee attorney fee for chapter 7 is $1,500, while it ranges from $2,000 to $3,000 for chapter 13. Luckily, there are nonprofits like Upsolve that can help you generate your filing form for free if it’s a simple one. Local legal aids can also help at a reduced cost.

It requires effort on your path

Before filing for bankruptcy, the government requires you to get credit counseling for 180 days. If you’re applying to get your debt discharged, you also have to take the debtor education course.

Key Effects of Declaring Bankruptcy

Impact on Credit Score

Declaring bankruptcy is indicative that you are no longer paying your debts as originally agreed. This negatively impacts your credit history because it shows you’re not creditworthy. This is particularly true of Chapter 7 bankruptcy where some or all of your debts are written off. That’s why it stays on your credit report for up to 10 years.

On the other hand, Chapter 13 bankruptcy still shows a desire to repay part or all of your debt. That’s why it’s viewed more favorably than Chapter 7 bankruptcy and will only stay in your credit report for up to 7 years.

Securing new credit after declaring bankruptcy is difficult as many lenders are leery of extending funds to you. However, you might be able to find lenders that work specifically with bankrupt individuals. The good news is that hope is not lost. As you consistently portray good credit habits post-bankruptcy, your credit score improves.

Bankruptcy is Public Information

Bankruptcy proceedings are filed in the Public Access to Court Electronic Records, where it is mostly accessed by attorneys and creditors looking for bankruptcy information. However, anybody can register and access the information at just 10 cents per page. Anyone that’s not looking will not know about your bankruptcy status.

However, there are instances local newspapers may publish this information, especially if you’re a high profile person in the community.

Impact on Future Employment Prospects.

While many employers run a routine criminal background check on new employees, only a few do credit checks. According to a survey by CareerBuilder, only 29 % of employers do credit checks. Therefore, there’s a pretty strong chance your employer doesn’t find out about your bankruptcy.

However, if you work in the financial sector or a government agency, a credit check is a routine. And it makes sense they may not want to employ a bankrupt individual because they’re in a financially stressed situation and that increases the likelihood of theft or fraud.

Current employers don’t run a periodic credit check. So, provided you’re staying in your current job, you have absolutely nothing to worry about.


Declaring bankruptcy can be a tough decision but it can also be the best option to give you a fresh start. It is important not to see bankruptcy as a sign of failure. Rather, it is an opportunity to rise again stronger than ever.

As you navigate post-bankruptcy, make sure you monitor your credit scores to notice actions that help or negatively impact it. Do more of those positive actions and less of the negatives. If you notice any anomaly in your credit report, dispute it with the credit reporting agencies.

Reach out to us today for debt relief guidance. We’re here to simplify the process for you.

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