What Happens When You Claim Bankruptcy?

Understand the effects of filing for bankruptcy.

The U.S. Bankruptcy Code establishes the effects of filing for bankruptcy. Being a set of federal laws, the code ensures that what happens when a consumer files for bankruptcy is uniform across the United States. The process for claiming bankruptcy commences with filing a petition seeking either a Chapter 7 or Chapter 13 bankruptcy.

Types

The type of bankruptcy you select impacts what happens when you claim this type of legal relief. If you file a Chapter 7 bankruptcy, you end up receiving a discharge of debts. A discharge means that you no longer have liability to most if not all of your creditors. By filing a Chapter 13 bankruptcy, you pay off your obligations to creditors through a court-ordered repayment plan.

Immediate Protection from Creditors

The most immediate effect of claiming bankruptcy is the court's automatic stay order. This order requires all of your creditors to cease any collection activity against you. If you are involved in a lawsuit, the litigation must also pause. Neither additional collection activity nor further action in any lawsuit occurs absent specific permission from the bankruptcy court.

Claims by Creditors

As part of claiming bankruptcy, you provide the court with a complete list of all of your creditors. The court sends each creditor what is called a proof of claim form. Through this form, creditors make a formal claim to the court for money allegedly owed by you. If you pursue a Chapter 13 case, the creditors can be included in your repayment plan. If you file for Chapter 7 relief, the creditors claim likely will be discharged. However, if the court determines you have available assets, the creditor may be able to obtain at least a partial repayment of the amount claimed.

Misconceptions

One of the more common misconceptions associated with a bankruptcy claim is that there are no restrictions on the types of debts discharged or included in a repayment plan. In fact, most taxes cannot be included in a bankruptcy case, student loans generally are excluded as is past-due child support. These are debts you must continue to satisfy directly with the creditor.

Expert Assistance

The process of claiming bankruptcy can be streamlined by obtaining the services of an experienced lawyer. State as well as local bar organizations maintain directories of lawyers who practice in different areas of the law. Contact information for these groups is obtained through the American Bar Association at:

American Bar Association
321 N. Clark St.
Chicago, IL 60654-7598
312-988-5000
abanet.org

Visit the ABA's link in Resources for a search of available attorneys.

References

• Cornell University Law School: U.S. Bankruptcy Code
• "The Glannon Guide to Bankruptcy"; Nathalie Martin; 2006
• Cornell University Law School: Bankruptcy Overview

Resources

• U.S. Courts: Bankruptcy Forms
• U.S. Bankruptcy Court: Filing for Bankruptcy Without an Attorney
• American Bar Association: Directory of State and Local Bar Associations
• U.S. Bankruptcy Courts: Bankruptcy Basics Videos