How does bankruptcy work? Find out in this article


It is not easy for one to declare bankruptcy. However, there comes a time when you cannot just avoid it. The lenders are on your neck asking for their dues and you are living from hand to mouth. If this defines your life, filing for bankruptcy may be the most appropriate action to take. Where do you start? How does bankruptcy work? Let’s find out together.

What is bankruptcy?

The best way to look at bankruptcy is to consider it as some kind of relief for the lenders as well as the borrowers. It comes to a solution for predatory lending. This is something banks do to make money out of unsuspecting debtors. For example, you have several debts than you can even afford to pay, which forces you to work to pay them. This does not make you free.

How does bankruptcy work

Contrary to what many people think, bankruptcy laws were not formulated to shame debtors. They were formulated to assist people who can no longer pay what they owe, by getting the creditors off their back and giving them another chance to rise up again.

When you decide to file for bankruptcy, the court believes that you are telling them you cannot afford to pay your debts anymore. It also shows your honesty on your financial status; that you took the debt thinking you could pay but circumstances whacked your plans. Actually, bankruptcy is designed for people who want to start all over again, without creditors bothering them.

What bankruptcy options are there for you?

To know how bankruptcy works, you need to know what kinds of bankruptcy options you have. There are three types of bankruptcy. However, only two are mostly applied by individuals with the other one being reserved for corporations.

Here are the two commonly used types of bankruptcy:

Chapter 7 bankruptcy

Chapter 7 bankruptcy is popular among many people. It derives its name from the fact that the laws that govern it are enshrined in Chapter 7 of the code of bankruptcy. If you file for bankruptcy under this chapter, you can do away with various common debts, including medical bills, debt from your credit cards, house mortgage and any other kind of loan that you do not want to maintain. With this type of bankruptcy, you can get rid of all the debts that you have at once.

How bankruptcy works

If you have assets, a court-appointed Chapter 7 trustee sells those that are easily disposable, and the collections are divided among the listed creditors. You are allowed to keep the car and may be your home. The beauty with this plan is that you can do away with all unsecured loans such as hospital bills and the like.

Chapter 13 bankruptcy

If you have assets that you want to protect and, which may be liquidated indiscriminately in Chapter 7 bankruptcy, chapter 13 is the way to go.

It is also got its name from the chapter where its guidelines are outlined in the bankruptcy code. Here you can pay some or all your debts over a long period, mostly from 36 to 60 months.

Who is best suited to file for bankruptcy under Chapter 13? Firstly, if you have more income than what is stipulated in Chapter 7 bankruptcy, secondly, if you have assets, may be a house that you value very much, which could be unsafe under Chapter 7, thirdly, if you have debts that you would like more time to pay, Chapter 13 bankruptcy is suitable for you. It is also suitable when you might have filed for the Chapter 7 bankruptcy in the last 8 years and if you want to eliminate your second mortgage or decrease your liability on a car loan.

The procedure

While both types of bankruptcy are different, they almost follow the same procedure. The first thing you need to do is find a good lawyer to represent you. This is not a necessity, but it is important. Most people who try to save on the cost of the bankruptcy lawyer end up losing their assets.

To be on the safe side, get a qualified and experienced attorney to assist you. The next thing you should do is to prepare the required paperwork. It will depend on the bankruptcy type you are applying filing for.

Gather more supporting documents to accompany your schedules and petitions. The other important step is to seek credit-counseling services. When you have done all that, you can proceed to file for bankruptcy under Chapter 7 or Chapter 13, whichever is most appropriate for you.

You will be assigned a trustee who will see to the distribution of funds to the listed lenders. Now you know how bankruptcy works.

Craig R. Chlarson - Utah Bankruptcy Attorney

My name is Craig R. Chlarson. Whether you are seeking to eliminate your debt, typically through a chapter 7 filing, or whether you are seeking to reorganize your debt, typically through a chapter 13 filing, or even if you have basic bankruptcy questions, call me today. I can help you.

To schedule an appointment, call (435) 901-3449

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