What is “Bankruptcy”?

*****Disclaimer: This is not legal advice and is for educational purposes only. This does not create an attorney-client privilege.

If you`ve seen The Office, you might remember the episode where Michael Scott decides to “declare bankruptcy” by yelling it out loud and waiting for his debt to magically disappear. It is Oscar who informs him that you cannot just “declare” bankruptcy. So, what exactly is bankruptcy then? Bankruptcy is a legal process that is designed as a means for a person or business that is unable to pay their debts a way out, while still giving creditors the opportunity for repayment. Bankruptcy does allow the debtor relief from debt collectors, wage garnishments and more, but can also affect your ability to borrow and your credit score. There are a variety of types of bankruptcy, all of which are handled in the federal courts and outlined in the U.S. Bankruptcy Code.

The bankruptcy proceeding begins with the filing of a petition for bankruptcy. This process is most commonly initiated by the debtor, but can also be filed on behalf of the creditor seeking to collect on outstanding debts. After the petition is filed and approved, all of the debtors assets are assessed and evaluated for their value, and these assets may then be “liquidated”, and used to repay a certain portion of the debt due to the creditors.

Once you file for bankruptcy, you can expect immediate protection from creditors, called an automatic stay. This stay means that creditors can no longer pursue collection action; they must cease calling you, garnishing your wages or trying to collect on any debts. This includes debt from credit cards, medical bills, personal loans, unsecured debts and other types.

You will be given a case number and assigned a bankruptcy trustee, who will oversee the filing process of your chapter 7 or chapter 13 bankruptcy, your meeting of creditors, and other aspects of your case. This will include reviewing your documentation and they may also request additional documentation to verify your information.

Both chapter 7 and chapter 13 bankruptcies remain on your credit report for a certain period of time. For chapter 7, it remains on your record for 10 years, and for chapter 13 either 7, or 10 years if the filing was not completed to discharge. And although it does remain on record and initially can result in a drop in your credit score of 100-200 (or more) points, you can start working to bring it back up immediately. Because your bankruptcy will mean no more unsecured debts, you will no longer be missing payments and your credit score will have the opportunity to improve. With diligent work to rebuild it you can improve your score significantly from the initial damage within a couple years.

After your discharge is filed, you should begin receiving offers for credit cards. While many might think getting a credit card, many of which will be high interest cards, would be a bad idea after your outstanding credit forced you into bankruptcy, is not actually a bad idea. If you use a card to make small purchases that you know you can afford, and pay off the card immediately, you will actually gradually rebuild your credit.

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