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What Happens When You Declare Bankruptcy?

Last modified: Sep 29, 2022

If you're struggling with debt, you may wonder what happens when you declare bankruptcy.

Bankruptcy can provide a fresh start by wiping out some or all of your debts. However, it can have a long-term impact on your credit score and future finances. 

That being said, it's essential to understand the consequences of declaring bankruptcy before making any decisions.  

What Happens if I Declare Bankruptcy?

What does it mean to file for bankruptcy? When you declare bankruptcy, the first thing that happens is that an automatic stay goes into effect. This means that your creditors are legally barred from taking any further action against you. In other words, they can't try to collect on their debts, garnish your wages, or repossess your property. 

The next step is for you to file a petition with the bankruptcy court. This petition will list all of your debts, assets, and any property you want to keep (such as your home or car). You will also have to take a mandatory credit counseling course.

After you file your bankruptcy petition, your creditors will be notified and must stop pursuing any debt you owe. The court will then request specific information from you, including:

  • The total amount of debt

  • List of creditors

Once the court has this information, they will decide whether to discharge your debts (which means you don't have to pay them back) or create a repayment plan. If your repayment plan is approved, you will pay the court-appointed trustee every month until your debts are paid off.

If you declare bankruptcy, it will stay on your credit report for up to 10 years. This can make it difficult to get approved for new loans or lines of credit. However, it is possible to rebuild your credit after bankruptcy by making on-time payments and maintaining a good credit history.

Related: What Debts are Forgiven at Death?

Do You Get Out of All Debts if You Declare Bankruptcy?

You don't get out of all your debts if you declare bankruptcy. However, you can get rid of some or most of your debt, depending on the type of bankruptcy you file for and the laws in your state.

For example, if you file for Chapter 7 bankruptcy (also known as liquidation bankruptcy), you may be able to get rid of most, if not all, of your unsecured debt. These include credit card debt, lines of credit, bank loans, payday loans, and income tax debt. However, secured debts, such as mortgages and car loans, cannot be discharged in bankruptcy. 

While the purpose of both Chapter 7 and Chapter 13 bankruptcy is to end your financial burden so you may start fresh, not all obligations are suitable for discharge.

Filing for Bankruptcy: What Are Your Options?

There are six main types of bankruptcy that you can file for in the United States: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. Each type of bankruptcy has different requirements and guidelines, so it's important to understand which one is right for your situation before filing.

Chapter 7

Also known as "liquidation bankruptcy." It's the most common type of bankruptcy filed in the US, and it requires that you sell off any non-exempt assets to pay back creditors. If you don't have any non-exempt assets, your creditors may still be able to get reimbursed through your income if you have enough disposable income each month.

Chapter 9

Chapter 9 bankruptcy is only available to municipalities, including cities, towns, counties, and school districts. This type of bankruptcy allows them to reorganize their debt without liquidating any assets.

Chapter 11

Chapter 11 bankruptcy is also known as a "business reorganization bankruptcy." It's available to businesses and individuals, and it allows you to keep your business or assets while you repay creditors over time.

Chapter 12

Only available to family farmers and fishermen. It's similar to Chapter 13 in that you can keep your assets and repay creditors over time (up to five years), and the amount you have to repay each month may be lower.

Chapter 13

Chapter 13 bankruptcy is also known as "wage earner's bankruptcy." It's available to individuals who have a regular income, and it allows you to keep your assets while you repay creditors over time (usually three to five years).

Chapter 15

Chapter 15 bankruptcy is available when someone owes money to creditors in more than one country. This type of bankruptcy allows for the recognition of foreign bankruptcies in the US, which can help protect assets and repayments.

When you decide to file for bankruptcy, your lawyer will assist you in selecting the most appropriate bankruptcy chapter for your financial condition. Filing for bankruptcy is a lengthy and complicated process. However, your lawyer can walk you through the filing procedure from start to finish.

Discharging Debt Through Bankruptcy

When you file for bankruptcy protection, the court can free you from having to repay your creditors for some types of debts. This is called a "discharge." A bankruptcy discharge is permanent and prohibits creditors from taking any action to collect the debt, including wage garnishments, foreclosure, and lawsuits.  

The length of time it takes to complete your bankruptcy depends on the type you filed for. A Chapter 7 bankruptcy discharge order might take four months or more, while a Chapter 13 bankruptcy discharge might take three to five years. 

The court will mail you a notice when your bankruptcy case is complete, and the discharge is granted. The court will also send a copy of the order to each of your creditors.

Related: Should I Use Savings to Pay Off Debt?

Is a Lawyer Necessary?

This can be a complicated legal process, so some people choose to hire a lawyer to help them navigate it. Whether or not you need a lawyer is ultimately up to you, but there are some things to consider that may help you make your decision. 

If you have a lot of debt or your financial situation is particularly complex, hiring a lawyer may give you the best chance of getting the outcome you want from your bankruptcy case. A lawyer can help you understand the law and determine which type of bankruptcy is right for you. They can also negotiate with your creditors on your behalf and represent you in court if necessary.  

On the other hand, if you have a relatively small amount of debt and your financial situation is pretty straightforward, you may be able to handle your bankruptcy case on your own. In either case, it's important to make sure you understand the bankruptcy process and know what to expect before making any decisions. 

Advantages and Disadvantages of Declaring Bankruptcy

There are many reasons why someone might consider filing for bankruptcy. Some people may feel like they have no other choice, while others may see it as a way to start fresh. Whatever the reason, it's important to understand both the advantages and disadvantages of bankruptcy before making a decision.  


The biggest advantage of filing for bankruptcy is the fresh start. If you're struggling with a lot of debt, declaring bankruptcy can help you get out from under it and start over. This can be a huge relief, both financially and emotionally.   

Another advantage of bankruptcy is that it can stop creditors from harassing you. Once you've filed for bankruptcy, creditors cannot contact you or try to collect debts from you. This can give you some much-needed peace of mind. 

Bankruptcy can also help you keep your home and car. If you're at risk of losing your home to foreclosure or your car to repossession, filing for bankruptcy can help protect these assets.


While bankruptcy can offer some advantages, it also has some disadvantages. One of the biggest drawbacks is that it will stay on your credit report for seven to 10 years. This can make it difficult to get approved for a loan or a credit card during that time.  

Another downside to bankruptcy is that it can be expensive. You'll need to pay filing and attorney's fees, and you may need to take credit counseling courses.

Bankruptcy can also be stressful. The process can be complicated and confusing, and it can take a long time to get through it. You may also feel like you're losing everything you've worked so hard for.  

It's important to weigh the pros and cons carefully. Talk to a financial advisor or an attorney to see if bankruptcy is the right step toward getting your finances back on track.

Keep Track of Your Credit During the Process

It's crucial to keep track of your credit during the bankruptcy process. This will be one factor that determines whether you can get new lines of credit after your bankruptcy is discharged.     

If you have a high credit score, you'll likely be able to get new lines of credit more easily. However, if your credit score is low, it may be more challenging to get new lines of credit. Therefore, it's important to maintain a good credit score during the bankruptcy process.

You can do a few things to help improve your credit score, such as paying your bills on time to maintain a good payment history. It would also help if you tried to keep your balances low on your existing lines of credit. If you can do these things, you'll be in a better position to get new lines of credit after your bankruptcy is discharged.  

Related: How to Save More Than Half of Your Income?

Bottom Line

So, what happens when you declare bankruptcy?  

In a nutshell, the court appoints a trustee to take over your assets and liquidate them to pay off your creditors. This can be a lengthy process, but it ultimately allows you to start fresh without the burden of overwhelming debt

If you’re considering declaring bankruptcy, it’s important to consult with a lawyer who can guide you through the process and help protect your rights.


Are Bankruptcy Filings Publicly Available?

All documents submitted in a bankruptcy case are open to the public unless they are sealed. Documents from bankruptcy cases are public records.

Will Bankruptcy Affect My Job or Future Employment?

Most employers will check your credit history before hiring you, and if they see that you've filed for bankruptcy, they may be less likely to offer you a job. However, many employers understand and will take into account that you may have gone through tough times.

If you're already employed, filing for bankruptcy may not affect your job security, but it could affect your future career prospects. Bankruptcy will stay on your credit report for up to 10 years, so it could make it more challenging to get a loan or a mortgage in the future.

What Happens to My Credit if I Declare Bankruptcy?

Your credit rating will be negatively affected; It's what happens when you declare bankruptcy. It'll be more difficult for you to get loan approvals and reasonable interest rates in the future. However, filing for bankruptcy gives you a chance to start over financially. After you discharge your debts, you can begin rebuilding your credit by using credit responsibly and making timely payments on all of your bills.

Policy Advice is a website devoted to helping everyday people make, save, and grow money. While our team is comprised of personal finance pros with various areas of expertise, nothing can replace professional financial, tax, or legal advice.

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