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What Happens When You File for Bankruptcy: A Bankruptcy Guide

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Posted on January 23, 2025 in

Bankruptcy is a federal process for individuals, partnerships, and businesses that cannot pay all their debts. It is an opportunity for a fresh start.

To file for bankruptcy, you must complete the federal bankruptcy forms, which include the voluntary petition, schedules, and statements. The schedules alone require the disclosure of all assets, all income, all expenses, all debts, and executory contracts. The forms can be lengthy, over one hundred pages long once completed. Then, upon filing, a federal bankruptcy judge and court-appointed trustee will be assigned to your case. 

The bankruptcy process is governed by the Federal Bankruptcy Code and the local rules of the jurisdiction you are filing in. These laws and procedures can be difficult to navigate alone. Stone Rose Law has attorneys who are experienced with bankruptcy law and can assist people like you in getting through the bankruptcy process and finding the best option for your circumstances.

To speak with one of our Arizona bankruptcy lawyers, call us at (480) 498-8998 or reach out using our contact form.

what happens when you file for bankruptcy

Bankruptcy Types

What happens after you file for bankruptcy depends upon the type of bankruptcy you choose. There are six kinds of bankruptcy:

  • Chapter 7: This option discharges most of your debts. A court-appointed trustee can sell your assets and distribute the net proceeds to creditors if you have assets that are not protected by an exemption.
  • Chapter 9: This proceeding is for financially distressed municipalities.
  • Chapter 11: Also known as “reorganization bankruptcy,” this option is used mostly by businesses to restructure debts and preserve assets while allowing them to remain in business.
  • Chapter 12: This is designed for financially distressed family farmers and family fishermen.
  • Chapter 13: This option is a repayment bankruptcy for individuals who earn above the median income for their household or wish to keep their unprotected property. Some or all debts can be repaid with this option, and a discharge is entered at the end of three to five years. 
  • Chapter 15: This form of bankruptcy allows for cooperation between U.S. courts and foreign courts for foreign bankruptcy filings that affect financial interests in the U.S.

For our purposes here, we will confine our detailed examination of bankruptcy laws to Chapter 7 and Chapter 13, the forms that affect most individuals.

Factors Common to All Bankruptcies

Although individual bankruptcy chapters have their own specific requirements and considerations, some factors are universal to all bankruptcy options.

The Automatic Stay

Upon filing for bankruptcy, the automatic stay is immediately imposed. It puts a stop to most of your creditors’ collection efforts. Creditors are prohibited from collecting or seizing your assets through wage garnishment, levies, repossession, and foreclosures. They cannot call you, send your letters, or otherwise attempt to get you to pay your debts or threaten you with collections or other actions.

Two notable exceptions to the automatic stay are if you have support payment obligations or owe money from a criminal conviction.

Credit Counseling

Before you file for bankruptcy, you must complete an online credit counseling course with an organization approved by the U.S. Department of Justice’s U.S. Trustee Program. 

Stone Rose Law includes this course in our services for free

Listing Your Debts

You must provide the bankruptcy court with a list of all your creditors, the individuals and companies you owe a debt to, along with the amount owed. These include secured debts—loans that a creditor has attached a security interest to—and unsecured debts. If you work with Stone Rose Law, we make this process easy with a three-source credit report. 

Examples of secured debts include mortgages and car loans. Unsecured debts include credit card debt, unsecured personal loans, and medical bills.

Discharging Your Debts

When you file for bankruptcy protection, the bankruptcy court will discharge you from your obligation to repay your creditors for some or all of your debts. Once your debt is discharged, creditors cannot contact you or attempt to collect the debt.

How soon your debt discharges will take effect depends on which bankruptcy was filed. A Chapter 7 bankruptcy discharge order can take as little as five to six months. A Chapter 13 bankruptcy discharge can take three to five years.

Most consumer debts can be discharged in a bankruptcy filing, such as the following:

  • Credit card debts
  • Personal loans
  • Payday loans
  • Cash advances
  • Medical bills
  • Collection accounts
  • Business debts
  • Private loans you owe to a family member or friend
  • Past-due utility payments
  • Back rent
  • Repossession debt

Some debts cannot be discharged, such as the following:

  • Debts you did not declare in your bankruptcy filing
  • Secured debts attached to assets you are keeping
  • Certain tax debts
  • Government fines and penalties
  • Government-funded or guaranteed loans
  • Retirement plan loans
  • Debts for willful and malicious injuries to people or property
  • In most cases, federal student loans 
  • Court-ordered alimony and child support
  • Debts that arise after bankruptcy is filed
  • Some debts incurred in the six months before you file for bankruptcy
  • Loans obtained fraudulently
  • Debts from personal injury judgment awards while driving intoxicated

A bankruptcy discharge eliminates debts but does not eliminate liens. A lien is attached to personal property by a contractual agreement or a judicial order. This is where a creditor may take possession of your property, sell it at auction, and apply the proceeds to a loan balance.

Liens stay on the affected property until the debt gets paid, the property is surrendered, or when the lien is stripped off through bankruptcy (if the option is available). 

Chapter 7 Bankruptcy Relief

Also known as a liquidation bankruptcy, Chapter 7 bankruptcy can result in the sale of unprotected assets to pay some of your debts. Most assets are protected from liquidation. Generally, unprotected assets include boats, ATVS, rental property, stocks, cryptocurrency, cash, jewelry, recreational vehicles, and debts owed to you. If any creditors are paid, the remaining debt will be discharged.

Chapter 7 Eligibility

To qualify for relief under Chapter 7 of the Bankruptcy Code, you can be an individual, a partnership, a corporation, or another business entity. As long as you pass the means test, Chapter 7 relief is available no matter how much you owe. There is no minimum debt to file nor a debit limit.

If you filed a prior bankruptcy case and received a discharge, your Chapter 7 eligibility depends on which chapter you filed and the date you filed the last case. If your prior case was a Chapter 13, you will qualify six years after your filing date. If your prior case was a Chapter 7, you will qualify for another Chapter 7 case after eight years. 

If a bankruptcy court dismissed your prior bankruptcy petition because of a willful failure to appear before the court, comply with its orders, or if you voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens, you must wait 180 days before you can file again.

Also, you cannot use Chapter 7 if you have not received approved credit counseling within 180 days before filing.

Means Test for Chapter 7

If your current monthly income exceeds the state median, you are subject to a means test to determine whether you can still qualify for Chapter 7 filing after expenses and deductions are considered. If you earn less than the median, you should be eligible for Chapter 7.

Chapter 7 Filing Requirements

  • Pay $338 in filing fees. 
  • File a petition and provide schedules of your assets, liabilities, income, and expenses.
  • Attend a virtual 341 meeting of creditors—generally referred to as your bankruptcy hearing—usually within 30-45 days, before your court-appointed Trustee. The Trustee is required to ask a list of questions. The meeting is an opportunity for creditors to appear. Our team at Stone Rose Law will help prepare you for this meeting.

Exempt Property and Assets

Most assets are protected from Chapter 7 liquidation.  The protected items include:

  • Some or all of the equity in your car
  • Equity in your primary residence
  • Household furniture, electronics, and appliances
  • Clothing
  • Tools needed for your work
  • Some or all of your firearms
  • Pensions and retirement accounts, depending on the type
  • Money in your bank accounts up to a certain amount
  • Social Security Benefits
  • VA Disability Benefits

Nonexempt Property and Assets

Unprotected assets subject to possible liquidation may include:

  • Real property other than your primary residence
  • Recreational vehicles
  • Boats
  • A second car or truck
  • Collectibles or other valuable items
  • Case
  • Investment accounts
  • Stocks
  • Cryptocurrency
  • Personal Injury Claims

The Chapter 7 Discharge

Your Chapter 7 discharge is an order to your creditors stating the debts owed are now discharged and uncollectable. This means your creditor may not begin or continue any action against you to collect a discharged debt.

Note that you can lose your Chapter 7 discharge under some circumstances. The bankruptcy court may revoke a Chapter 7 discharge on the request of the trustee, a creditor, or the U.S. trustee under the following allegation:

  • The discharge was obtained fraudulently.
  • Failure to disclose property you own or disclose property you are entitled to.
  • One of several acts of impropriety, such as failing to obey a lawful order of the court.
  • Failure to explain any misstatements during an audit of the case. 
  • Failure to provide requested documents or information during an audit of the case.

Chapter 13 Bankruptcy

Under a Chapter 13 bankruptcy, the bankruptcy court will help you reorganize your debts so you can pay off some or all of what you owe over three to five years. Under Chapter 13, you will be paying some of your debt, and it will remain on your credit report for seven years from the filing date instead of for 10 years, as with a Chapter 7 bankruptcy.

Chapter 13 Eligibility

You can only file for bankruptcy under Chapter 13 if you have less than $465,275 in unsecured debt in cases filed between April 1, 2022, and March 31, 2025. You must also have less than $1,395,875 in secured debt for cases filed between those same dates.

Chapter 13 Filing Requirements

  • Pay $313 in filing fees.
  • File a petition and propose a repayment plan to pay off a portion of your debts over 3-5 years.
  • Attend a creditors meeting.
  • Make regular payments according to your plan, which may include catching up on late mortgage or car loan payments to keep the property. The trustee collects your payments and distributes them to your creditors.
  • Submit a proposed confirmation order in response to the Trustee’s Recommendation for Confirmation in four to six months after filing. Your bankruptcy attorney will help you navigate this step. 

Advantages of a Chapter 13 Bankruptcy Filing

Using Chapter 13 can give you some unique advantages. These may include:

  • Stopping a mortgage foreclosure. You must show that you have enough income to pay overdue amounts and remain current on future payments.
  • Let you keep property not protected by a bankruptcy exemption. Unlike a Chapter 7 bankruptcy, in which you must surrender nonexempt property, Chapter 13 filers pay the value of nonexempt property to creditors through the repayment plan.
  • Protect a cosigner or codebtor. Filing for Chapter 7 won’t protect a cosigner from a creditor, but a Chapter 13 plan that pays for the debt can offer more protection for the cosigner.
  • “Cramdown” secured debt when property is worth less than the amount owed. Subject to certain restrictions, a Chapter 13 bankruptcy allows you to reduce the principal balance owed to some secured creditors, such as a vehicle lender, to the fair market value of the property securing it.

Fresh Financial Start After Bankruptcy

Although a bankruptcy will stay on your credit reports for several years, its impact can diminish over time. Your credit will drop after a bankruptcy filing, but your credit score will quickly improve. You’ll be offered credit shortly after filing for bankruptcy, which will help with credit recovery. The interest will be high until your credit score recovers.  

One way to rebuild your credit is with a secured credit card, which uses a deposit you make with the issuing bank. As long as you use a secured credit card wisely and make your payments on time, you can begin building a fresh credit history.

Call Stone Rose Law When You Need to Consider Bankruptcy

You can file for bankruptcy independently, but the process is long and complicated. Even the U.S. Bankruptcy Courts recommend working with an attorney to help you fully understand your options, exemptions, bankruptcy’s benefits, and the complexities of the process in a bankruptcy case.

The Phoenix bankruptcy attorneys at Stone Rose Law are here to help anyone in Arizona with their bankruptcy filing needs.

Are you ready to stop the calls, regain peace of mind, and achieve financial freedom through debt relief? Are you ready to live debt-free? Call Stone Rose Law today at (480) 498-8998 or use our contact form.