Consequences Of Bankruptcy


Exactly what happens to your finances (and daily life) after bankruptcy? There are a lot of bankruptcy myths and misconceptions out there—like thinking that filing for bankruptcy ruins your credit forever or that it will automatically strip you of all your property. Today, we’re going to dispel the falsehoods and fill you in on what really happens after you undergo bankruptcy.

So, What Is Bankruptcy, Really?

Part of the reason that so many are confused about the outcomes of bankruptcy is that they’re unfamiliar with what the process really is. Let’s take a moment to explain it in plain language so you’ll have a better idea of what’s in store once the process is complete.

In most cases, you file for bankruptcy because your debts have become so great that you don’t believe you can pay them any longer. A court, then will decide what to do with your debts—what gets discharged, how much you have to pay back, etc. Not all bankruptcies are the same, however, and to further clarify what will happen in the aftermath you’ll need to understand the differences between the two major flavors: Chapter 7 and Chapter 13.

A Chapter 7 bankruptcy is what’s known as a “liquidation” bankruptcy. This means that your non-exempt property will be sold off to repay your creditors, and many of your debts will be discharged over the course of the bankruptcy process. So, in a Chapter 7 filing, you won’t lose all your property (as some people erroneously believe) and you’ll actually get to keep some exempted property during the process. This varies from state to state, but might include:

  • Your car
  • Home equity
  • Social Security checks
  • Pensions
  • Veteran’s benefits
  • Welfare
  • Retirement savings

In Chapter 13 bankruptcies, on the other hand, you’ll pay some of your debts and try to have the rest forgiven. This is usually undertaken by people who wish to keep more of their property or who cannot qualify for Chapter 7 bankruptcy on account of their income level. You’ll enter a 3-to-5 year repayment plan, and, for the most part, hang on to what you own provided you can stay current with all your payments and obligations.

Bankruptcy Aftermath

Now that you understand the two most frequent forms of  bankruptcy, let’s talk about what happens after everything “shakes out,” so to speak. 

We’ve already alluded to what happens with assets like your home and car, but to be more specific, it’s important for you to remember that you will generally get to hold onto your car in both bankruptcy types, and your home will also stay in your possession in a Chapter 13 bankruptcy if you keep up with payments. There are, however, some instances where, during a Chapter 7 bankruptcy, your trustee will use the equity in your home to pay off your creditors, so bear that in mind. 

As for how bankruptcy will affect your credit and record, you should know that bankruptcy is a part of your public record, so anyone could find out, should they look the information up, and the bankruptcy will be on your credit report for a decade (in the case of Chapter 7 bankruptcies) or seven years (in the case of Chapter 13 bankruptcies). Your credit score will take a hit, but it’s something you can recover from, provided you take the right steps forward.