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What Happens When You File for Bankruptcy?

— June 8, 2022

There are many of you out there wondering if the bankruptcy will affect your future job or employment.

Being bankrupt is never easy. It is a very stressful situation that you must deal with. In addition to the tough situation that you find yourself in, you also have to handle all the collection calls at home. In times like this, you should never be afraid to ask for help.  A personal bankruptcy lawyer can help you with legal advice so that you can make the most out of this case.

But what actually happens when you file for bankruptcy? Let’s find out.

Things to Know Before Filing for Bankruptcy

Try and leave bankruptcy as your last resort when you are struggling with bills since there are plenty of other alternatives beforehand. For example, you can try contacting your creditors for a negotiation. Most of them will agree to get reduced payments over a longer period.

In case you are struggling with a home mortgage, contact your loan services. There should be various options available for you, such as forbearance or loan modification. Also, if you are struggling with taxes, the IRS will usually agree to offer a payment plan or accept an offer in compromise.

How to File for Bankruptcy?

If all else fails, here is how you can file for bankruptcy. The first thing you need to do is to consult an attorney. While filing without an attorney is also possible, it is not really recommended, according to the Administrative Office of U.S. Courts.

Before filing, you will be approached by a credit counselor that will evaluate your personal financial situation and help you create a budget plan, after showing you the alternatives to bankruptcy. 

This counselor should be part of an organization approved by the Department of Justice U.S Trustee Program. If you cannot afford to pay, the counseling session can be free. However, if you can afford it, it costs about $50. The counselor should advise what is the best type of bankruptcy for you.

Types of Bankruptcy

While it’s true that there are many types of business bankruptcy, when it comes to personal bankruptcy, the most common ones are Chapter 7 and Chapter 13.

Chapter 7 bankruptcy liquidates your assets in order to pay your creditors. What this means is that your home equity will go to your creditors. Even though your house will be sold, you get to keep your personal belongings, such as automobiles, personal items, tools, or clothing. 

Home equity refers to your property, but not your main residence, boats, a second car, collectibles, or other valuable items, as well as bank accounts and/or investment accounts.

Chapter 13, on the other hand, lets you keep all your assets, but the collector will need to get their money back over the next three to five years. 

What Happens to Your Credit in Case of Bankruptcy?

When you are declaring bankruptcy, you let everyone know that you can no longer afford to pay your debts and it can seriously damage your credit history. That being said, the chapter 7 bankruptcy stays on your report for up to ten years. Chapter 13 bankruptcy is not well seen but is favored because you are paying part of your debts and it stays on your report for up to seven years.

Man and woman in a meeting; image by Charles, via
Image by Charles, via

After your bankruptcy is discharged by the court, it will be very difficult for you the get credit approvals. However, there are certain lenders that prefer working with former bankrupt people. There is also the new credit scoring system that favors new information over the old one.

Job or Future Employment

There are many of you out there wondering if the bankruptcy will affect your future job or employment. There are indeed certain employers that check the credit of new applicants. So, given this fact, bankruptcy could be an issue when applying for a new job. That’s especially the case if the job is in financial services or a government entity. However, if an employer simply runs a criminal background check, the bankruptcy won’t show up.

It is less common for companies to run checks on active employees. So, unless you are planning on switching jobs, your current one should be fine. 

The Bottom Line

Bankruptcy was never an easy thing to get through. Between going to the court, going to counseling, and having to give back every dime, it is good to know that there are also some positive aspects. For example, it will not affect your employment that much and it will also remain on your record only for a couple of years. 

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