How Does Bankruptcy Work? A Step-by-Step Guide to Debt Relief

If you’re overwhelmed by debt and wondering, “How does bankruptcy work?” you’re not alone. Bankruptcy can be a powerful tool to help you regain control of your finances, but the process can seem complex. At LONG & LONG P.C., our experienced bankruptcy attorneys are here to simplify it for you. In this guide, we’ll walk you through how bankruptcy works, the steps involved, and what it means for your financial future.

What Does Bankruptcy Do?

Bankruptcy is a legal process governed by federal law that helps individuals and businesses manage or eliminate debts they cannot pay. It provides a fresh start by either discharging (eliminating) certain debts or restructuring them into a manageable repayment plan. When you file for bankruptcy, an automatic stay immediately stops most creditor actions, such as collection calls, lawsuits, wage garnishments, and foreclosures, giving you time to address your financial situation.

Types of Bankruptcy for Individuals

Before diving into the process, it’s important to know the two main types of bankruptcy for individuals: Chapter 7 and Chapter 13. Each works differently and suits different financial situations.

• Chapter 7 (Liquidation): This eliminates most unsecured debts (e.g., credit cards, medical bills) by liquidating non-exempt assets to pay creditors. It’s ideal for those with low income and few assets.
• Chapter 13 (Repayment Plan): This allows you to keep your property while repaying debts over 3–5 years. It’s suited for those with regular income who want to protect assets like a home or car.

How Does Bankruptcy Work? A Step-by-Step Guide

The bankruptcy process varies slightly depending on whether you file Chapter 7 or Chapter 13, but here’s a general overview of the key steps:

Step 1: Evaluate Your Financial Situation

Start by assessing your debts, income, expenses, and assets. Consulting a bankruptcy attorney is crucial at this stage. They’ll help determine if bankruptcy is the best option or if alternatives like debt settlement or credit counseling might work better. A qualified attorney can also recommend whether Chapter 7 or Chapter 13 is right for you.  

Step 2: Complete Credit Counseling

Before filing, you must complete a credit counseling course from an approved agency. This course, which takes about 1–2 hours, reviews your financial situation and explores debt relief options. You’ll receive a certificate of completion, which must be filed with your bankruptcy petition.

Step 3: File the Bankruptcy Petition

Filing begins with submitting a bankruptcy petition to the federal bankruptcy court in your district. This includes detailed forms listing your income, expenses, assets, debts, and financial transactions. Once filed, the automatic stay takes effect, halting creditor actions. Your attorney will ensure all paperwork is accurate to avoid delays or complications.  https://www.uscourts.gov/court-programs/bankruptcy

Step 4: Meet with the Bankruptcy Trustee

After filing, a bankruptcy trustee is appointed to oversee your case. You’ll attend a 341 meeting of creditors (named after Section 341 of the Bankruptcy Code), typically 20–40 days after filing. At this meeting, the trustee and creditors (if they attend) ask questions about your finances under oath. Your attorney will prepare you for this straightforward process, which usually lasts 10–15 minutes. https://www.cacb.uscourts.gov/video/bankruptcy-basics-part-5-creditors-meeting

Step 5: Follow the Bankruptcy Process

The next steps depend on your bankruptcy type:

Chapter 7: The trustee reviews your assets to determine if any non-exempt property can be sold to pay creditors. In most cases, filers keep all their property due to exemptions. After 60–90 days, eligible debts are discharged, meaning you’re no longer obligated to pay them. The entire process typically takes 4–6 months. https://www.irs.gov/businesses/small-businesses-self-employed/bankruptcy-frequently-asked-questions

Chapter 13: You propose a repayment plan, which the court must approve. You’ll make monthly payments to the trustee, who distributes funds to creditors. The plan lasts 3–5 years and remaining eligible debts may be discharged upon completion.  https://www.weltman.com/publication-your-top-chapter-7-and-13-bankruptcy-questions-answered

Step 6: Complete a Financial Management Course

Before receiving a discharge, you must complete a debtor education course (different from the initial credit counseling). This course teaches budgeting and financial management skills to help you avoid future debt problems. You’ll file a certificate of completion with the court.

Step 7: Receive Your Discharge

Once all requirements are met, the court issues a discharge order. In Chapter 7, this wipes out eligible debts. In Chapter 13, it eliminates remaining eligible debts after completing the repayment plan. Note that some debts, like student loans, child support, and certain taxes, are typically not dischargeable. https://www.justice.gov/ust/bankruptcy-information-sheet-0

What Happens After Bankruptcy?

After bankruptcy, you can start rebuilding your financial life. While bankruptcy stays on your credit report for 7–10 years (7 for Chapter 13, 10 for Chapter 7), its impact lessens over time. To rebuild credit, focus on paying bills on time, maintaining a low debt-to-income ratio, and using secured credit cards responsibly. https://www.boginmunns.com/faqs/bankruptcy-frequently-asked-questions/

Bankruptcy also offers a fresh start, free from the stress of unmanageable debt. You may be able to qualify for certain loans, like FHA mortgages, as soon as 1–2 years after filing, depending on your situation.

Why Work with LONG & LONG P.C.?

Attorney Martin E. Long is a former Bankruptcy Trustee for the U.S. Bankruptcy Court, District of Colorado. Navigating bankruptcy can be overwhelming, but you don’t have to do it alone. At LONG & LONG P.C., our compassionate bankruptcy attorneys in Denver, Colorado have helped countless clients throughout Colorado achieve debt relief through Chapter 7 and Chapter 13. We provide personalized guidance, from filing your petition to securing your discharge, ensuring a smooth process.

Ready to take control of your finances? Contact us today for a free consultation. Call 303-832-2655 or fill out our online contact form to schedule an appointment. Let us help you start your journey to a debt-free future.

Frequently Asked Questions About Bankruptcy

Will I lose everything if I file for bankruptcy?

No. Exemptions protect certain assets, like your home, car, and personal belongings, in most cases. An experienced bankruptcy attorney will maximize what you keep.

 Common Bankruptcy Questions

How long does bankruptcy take?

Chapter 7 typically takes 4–6 months, while Chapter 13 lasts 3–5 years due to the repayment plan.  https://hallnavarro.com/11-common-bankruptcy-questions-answered/

Can bankruptcy stop foreclosure?

Yes, the automatic stay can temporarily halt foreclosure, and Chapter 13 can help you catch up on missed payments.

Don’t let debt control your life. Contact LONG & LONG P.C. at 303-832-2655 or through this website. You will receive a quick response today to learn how bankruptcy works and explore your path to financial freedom./bankruptcy-blog/chapter-7-vs-chapter-13-bankruptcy/