How Bankruptcy Works

A few years ago changes to the bankruptcy law made the process less likely to be abused. This may have reduced the number of people who fraudulently racked up debt with no intention of repaying their debts; however, people who suffer a legitimate financial hardship now pay the price. Filing for bankruptcy carries with it a social stigma that can last for many years after your debt is forgiven and there is no such thing as a fresh start. You may be absolved or repay your debt but the damage to your credit and lasting presence on your credit report are very serious consequences that should be considered. Nevertheless, if you find yourself in a position where all other methods of repaying debt are not an option, it is a legal way to deal with your financial problems. Before moving forward you should first understand how bankruptcy works.

What Happens When You File Bankruptcy?

Once you have contacted a bankruptcy attorney and you have decided this is the route you are going to take you can expect the following things to happen.

• Creditor activity stops- An order for relief is automatically issued once your petition is recorded in bankruptcy court. This means that calls, letters, wage garnishments, foreclosures and repossessions are prohibited for that point forward. This will provide immediate relief from the stress of constantly trying to fend off debt collectors.
• Case is administered- Basically depending on what type of bankruptcy you have filed the next step in the process is either liquidating non-exempt assets or establishing a repayment plan. Chapter 7 bankruptcy absolves you of your debt but not without first selling certain assets for the purpose of distribution to your creditors. This type of bankruptcy is considered less favorable than Chapter 13 bankruptcy in which you work with your creditors to repay your debt over a certain period of time. This reorganization of your financial situation shows current future lenders that you are at least willing to try to meet your end of the financial contract.
• Impacts to credit- There is no avoiding the fact that filing for bankruptcy is the worst thing you can do to your credit. It will remain on your credit report from 7-10 years although you should be able to see signs of recover in that time. Some lenders will actually consider you less of a risk immediately after you file for bankruptcy as you are currently free of debt and unable to file again for several years.

There are many things to consider before filing for bankruptcy and the pros and cons should be weighed carefully. Whenever possible it is recommended you avoid this type of debt elimination, however that is not always possible. If you are forced to file for bankruptcy do not let the lesson go unlearned. Find out what caused your financial problems and take the steps necessary to avoid ever needing to file for bankruptcy again.