What Can You Not Do After Filing Bankruptcies

Managing debt can be a difficult challenge during periods of rising economic strain and persistently high interest rates. The recent increase in personal loan bankruptcy queries indicates that Chapter 7 bankruptcy (also known as liquidation bankruptcy) is becoming a more popular choice in such a harsh environment.

This type of bankruptcy is often considered a financial lifeline. It offers a financial reset for people looking to eliminate different types of debt, such as personal loans, tax debts, credit card balances, or medical bills. Others find Chapter 13 bankruptcy (often referred to as reorganization bankruptcy) a better option to restructure their debts.

No matter what option you want to choose, you should have a clear understanding of what can’t be done after filing. While bankruptcy can be a powerful tool for rebuilding your credit and enhancing your financial situation, it can’t solve all debt or financial problems.

What Bankruptcy Can Do

First, let’s see what you can expect in Chapters 13 and 7. Bankruptcy can halt most wage garnishments, lawsuits, as well as other types of collection actions. Also, it can eliminate a variety of debts.

• Halting collection activities and creditor harassment — Once you’ve filed for Chapter 7 or 13, most of your lawsuits and creditor calls (with certain exceptions) will be stopped thanks to the automatic stay issued by the court.
• Eliminating non-priority unsecured debts (like credit card balances, personal loans, overdue utility payments, medical bills, etc.)  — This pertains to debt for which you agreed not to return the property you bought in the event that you were unable to make payments. If a secured credit card is used, the purchased items (like large appliances, computers, electronics, jewelry, and furniture) must be returned.
• Erasing secured debt — Car loans and mortgages are debts that are often secured with collateral. If the purchased property is surrendered during bankruptcy, these debts may be discharged altogether. That means you will have to return the collateral.
• Stopping evictions, as well as repossessions and foreclosures — As long as these actions are pending, the automatic stay is going to stop them. However, bankruptcy will not help once it’s finished.
• Rebuilding your credit — When an unpaid debt remains on a credit report, repairing credit is almost impossible. Fortunately, you will be able to eliminate most of your debts while repaying others in bankruptcy cases. It allows you to open a new account and rebuild your credit after filing. You’ll see a decline in your credit score, though. This is especially true if there were delays in payments before you filed for bankruptcy.

What Only Chapter 13 Can Do

Despite the fact that Chapter 7 is the most popular and most common type of bankruptcy in the U.S., Chapter 13 can provide more benefits. Listed below are the things that can only be accomplished through Chapter 13:

 

• Protecting a co-debtor or co-signer
• Stopping a mortgage foreclosure
• Keeping property that isn’t protected by a bankruptcy exemption so that the nonexempt property value is paid through your repayment plan
• Eliminating a junior mortgage by using “lien stripping” in case the amount you owe is worth a lot more than your house

 

What Bankruptcy Can’t Do

Not all debt and financial problems can be solved through bankruptcy. Notably, it is not possible to eliminate every type of obligation or stop every single creditor. Your recent tax debt, past-due alimony and child support, or student loan will still need to be paid.

The following are nondischargeable debts that CANNOT be erased by filing for bankruptcy:

• Alimony obligations and child support
• Most tax debts, especially the older ones that have not been paid yet
• Student loans (unless you prove that you’re not able to repay your loan currently)
• Debts for fatalities or personal injuries caused by drunk driving
• Penalties and fines that are administered as punishment (like criminal restitution and traffic tickets)
• Debts you neglected to include in your bankruptcy filing
• Fraud-related debts

Property Loss

In some Chapter 13 and Chapter 7 cases, retaining all of your property is not a given. Remember that a secured creditor may still foreclose or reclaim unaffordable property even if you file for bankruptcy.

Related: Can i keep my house and car if I file for bankruptcy

Inconvenience and Social Stigma

Aside from the property loss and above-mentioned debts, bankruptcy is also associated with social stigma. You may feel shame after filing. That’s why you should explore other options, including debt consolidation, forbearance or deferment, debt restructuring, and debt management plans.

While these alternatives to bankruptcy might also have a bad effect on your credit, it is usually less drastic. Sadly, there is no solution to prevent credit score declines and short-term issues with bank account opening, home leasing, or other financial operations.

Chapter 7 Bankruptcy: What Can’t Be Done After Filing?

You won’t be able to discharge all debts

Many, but not all, unsecured debts are discharged under Chapter 7. The majority of student loans, recent income taxes, alimony, and child support are among the obligations that cannot be discharged. You will still be liable for those kinds of debts, while creditors may still pursue collection efforts even if you receive a full discharge.

Keeping all your assets will be impossible

For each state, there are specific “exempt” assets that can be protected. Nevertheless, the trustee may seize and sell anything that is thought to be non-exempt. This may include everything from investment properties to valuable collections and second cars.

Your co-signers cannot be protected from collections

Those who co-sign loans (like personal or car loans) are not protected by bankruptcy discharge. After filing, creditors may demand full payment from co-signers or even pursue legal action. So, your co-signer can’t be protected from collections.

Filing again will not be possible for a long time

After receiving discharge, you can’t file a Chapter 7 again for 8 years. Even if you experience financial difficulties during this period, the waiting period still remains in effect. Chapter 7 isn’t a recurring fix. It should be deemed a one-time solution.

You will not be able to rebuild your credit immediately

Rebuilding credit takes strategic planning, effort, and time. For ten years, Chapter 7 remains on your credit report. Even though some lenders could be open to granting loans within a year (or even two) following discharge, the interest rates are usually extremely high. In any case, your creditworthiness is going to suffer after filing.

You won’t be able to pick who will get paid

Your finances will be taken over by a bankruptcy trustee after filing for Chapter 7. Prior to the conclusion of your case, payments (like loan repayment) made just before the date of the filing can be undone by your trustee. Preferential payments are reclaimed because all creditors are treated equally by the bankruptcy code.

Mistakes to Avoid When Filing for Bankruptcy

Our attorneys have been assisting thousands of Maui residents in their financial recovery for over 50 years of collective legal experience. Based on the knowledge gained, these are the most common mistakes people make after declaring bankruptcy:

• Accumulating debt — Many people take on new debt right after they file for bankruptcy. Don’t do it! You’d have a hard time recovering financially. After filing, you should avoid taking out loans and opening new credit cards.
• Not updating financial data — If any shifts occur in your financial situation after filing, be sure to notify your trustee as soon as you can. Make sure the bankruptcy trustee is familiar with any changes to your expenses or income to avoid problems.
• Failing or neglecting to rebuild credit — If you don’t work on improving your credit score, your financial opportunities will be severely limited in the future. Reestablish your credit after filing by applying for secured credit cards and paying your bills promptly.
• Ignoring post-bankruptcy education — Financial education allows you to learn how to improve your finances after receiving a discharge. Moreover, you can learn how to handle your money in a responsible way. Those who ignore it often fall back into their old spending habits.
• Leaving out debts after filing — Throughout bankruptcy proceedings, every debt should be declared. Otherwise, creditors may still pursue collection, while your unreported debts might not be eliminated. It is a good idea to compile a detailed list of your creditors along with the amounts you owe them.
• Racking up debt on credit cards — Do not use them before filing for bankruptcy, as the judge and your trustee may look at you with suspicion. As a result, any substantial purchase you made less than 90 days from the date of submission may not be discharged. It may also result in dismissing your bankruptcy case.
• Filing for bankruptcy to avoid having to pay a lawsuit judgment — Many people declare bankruptcy to dodge a lawsuit. It doesn’t work, especially not for nondischargeable debts. While a lawsuit judgment must be paid, court-mandated payments are sometimes erased during bankruptcy proceedings.
• Hiding assets — It is not uncommon for filers to hide assets (like hidden cash, bank accounts, and offshore accounts) from their bankruptcy trustee. Don’t try to do it! If your trustee finds out that you intentionally hide assets, you could be left without a discharge. Additionally, you may end up with criminal charges and fines.
• Avoiding financial planning and budgeting — If you want to manage your expenses and incomes effectively, take the time to create a budget after bankruptcy. From healthcare expenses and utilities to rent and food, every necessary expense and source of income should be included.

Related: How to file for bankruptcy

Final Thoughts

While there are many online resources and articles about bankruptcy issues, your best option is to hire a local attorney. That’s because every case is specific. Look for an experienced bankruptcy lawyer who will protect your assets and come up with a solution customized for the particulars of your situation.