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What is it Like to Declare Bankruptcy?

Credit card companies, big banks, and even medical institutions have done a great job of convincing the American public that bankruptcy  is the boogeyman. A thing to be avoided at all costs.

Meanwhile, corporations declare Chapter 11 whenever they get into trouble, and nobody loses any sleep over it.

What’s bankruptcy really like? Is it really as bad as everyone says?

If you have a lawyer, the process is straightforward.

Bankruptcy law is complicated. That’s why you get a lawyer: to handle the complicated parts.

For most people, bankruptcy will look something like this.

  1. You’ll consult with an attorney. Ideally you’ll already have all of your creditors and debts listed out for the lawyer to look at.
  2. You’ll pay the lawyer a retainer and sign a retainer agreement.
  3. The lawyer will have you fill out a simple form, and will ask you for certain documents to back up the claims you’re making, like W2s, bank statements, and copies of the bills. The form will list your income, debts, creditors, and current expenses.
  4. You’ll pay the court filing fee.
  5. You’ll take a quick online debt management course and receive a certificate that will get included with the rest of your bankruptcy paperwork.
  6. You go to your 341 hearing. For the vast majority of borrowers, this meeting will be fast and boring. The trustee asks you questions, mostly to verify information you’ve already given. Creditors are given the option to show up. Few do.
  7. What happens next depends on the form of bankruptcy you’re filing.
    1. If you’ve declared Chapter 13 your attorney will submit a proposed payment plan to the trustee on your behalf. The trustee approves it or denies it. If the plan gets rejected the attorney works to put together a new plan. If the plan is approved you’ll receive instructions on how, when, where, and how much to pay.
    2. If you’ve declared Chapter 7 you may not even have to do anything else.
  8. You receive your discharge via the mail. The only debts you’ll have left are the ones which were not eligible for discharge.

Will I have to go to court?

Technically the 341 hearing is “going to court,” though it won’t look like it or feel like it. For the most part, that’s the only court hearing you’ll have to attend. Often a judge will sign off on a Chapter 7 discharge right after the 341 hearing. You’ll get it in the mail.

Usually you only have to worry about meeting creditors in a 341 hearing or going to court if one of a few things is true.

  1. The creditor is trying to get permission to ignore the automatic stay and is claiming that the stay protection is creating an undue hardship.
  2. The creditor wants to accuse you of committing fraud.
  3. Some other unusual snag or complication has come up in your bankruptcy case.

With the help of a good lawyer the chances of these issues arising should at the least be minimized. That’s not to say you’ve got a bad lawyer if they come up. It’s just that for the most part, your lawyer should be catching anything that might put you in the first two types of trouble.

If you’re likely to face a snag or complication the lawyer might be able to spot that prior to filing, so you’ll at least be prepared for it.

What happens after bankruptcy?

Not much. Chances are you still have a place to live. You still have a way to get to work. You have these things because your attorney has used the proper form of bankruptcy and/or the proper exemptions to make sure you do. 

You also still have all of your household goods. Absent any outside factors unrelated to the bankruptcy, you still have your job.

What you don’t have is thousands of dollars of debt, and embarrassing, stressful collection calls.

You might also be thinking: “I also don’t have any way to get access to credit,” and here you’d be 100% incorrect. 

You’ll start receiving credit card and car loan offers in the mail before the ink is even dry on your discharge. Should you take them? Probably not. The terms will be dismal and the interest rates high. There are safer ways to rebuild your credit.

Still, they should reassure you that you can indeed re-enter the debt-based economy when you want to, should you want to.

Most negativity about bankruptcy is self-imposed.

The sense of desperation, shame, or stress you might feel over having to file is optional. Indeed, you can shrug and say this is the system that allows Americans to take risks. It’s a system that’s vital to the economy. You’re not hurting anyone by exercising it: all that debt will be a tax write-off for the companies involved. 

Big business doesn’t feel bad about raising rents and mortgages to the point where a family might struggle. Hospitals don’t feel bad about charging $300 for an aspirin. No company feels bad about getting bailouts anywhere they can find them.

Why should you? 

See also:

Can Creditors Send You to Jail?

What is Zombie Debt?

4 Things to Do Before Paying a Debt Collector

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