Your bankruptcy lawyer just filed your Chapter 7 petition with the Bankruptcy Court. Now what? What happens after a Chapter 7 Bankruptcy is filed?

Chapter 7 Bankruptcy Filing Triggers Nationwide Injunction Against All Creditors

Filing a Chapter 7 Bankruptcy immediately triggers a nationwide injunction against all the creditors listed on your bankruptcy petition (see 11 U.S.C. § 362 of the bankruptcy code; go ahead, read it and geek out – you know I do!). Your creditors can no longer lawfully hassle you about payment. Sadly, this doesn’t mean they won’t try (many do), but it does mean that your bankruptcy attorney can and should remind creditors of the law prohibiting them from contacting you and promising sanctions if they don’t knock it off.

Chapter 7 Bankruptcy Filing Alerts Credit Agencies – Credit Score Drops

As soon as the Bankruptcy Petition is Filed, notice of your bankruptcy is sent not only to all your creditors, but also to all Credit Agencies. The bad news is that a negative impact on your credit score will occur immediately, and can be a drop of up to 150 points. The good news is that, for many people, the decrease in their credit score isn’t 150 points and isn’t as bad as they expected. There are several reasons for this. First, people who’ve struggled with debt already have taken a big hit to their credit scores as overdue balances, late fees and other negative items piled up. By the time a bankruptcy is filed, many people’s credit scores are close to bottom. Second, delinquent accounts (a factor in a credit score) are taken off credit reports entirely by a bankruptcy. Also, a person’s debt-to-credit ratio, which comprises 30 percent of a credit score, improves because credit cards are closed, thus decreasing available credit and improving this ratio. Finally, credit agencies view filing bankruptcy (rightly) as a positive step: it means the debt that’s been swamping the debtor will be discharged (wiped out), giving the debtor a fresh chance to build good credit history and demonstrate credit worthiness.

Chapter 7 Bankruptcy Filing Leads to All Credit Cards Being Closed & Other Credit Becoming Scarce and More Expensive

All credit cards of a debtor are closed as soon as a bankruptcy is filed. Card issuers do not want to extend credit they know never be repaid. While living without credit cards is inconvenient, it is also a small price to pay for having tens or even hundreds of thousands of dollars of debt wiped out. Moreover, anyone filing bankruptcy to cancel excess debt, probably should not be borrowing more money. Access to other forms of credit – such as car loans and mortgages – also dries up temporarily after filing bankruptcy. Plus, if a lender extends credit, it is likely that the interest rate charged will be higher. Lenders believe people who’ve filed bankruptcy are at a higher risk of default than someone who hasn’t filed bankruptcy. Finally, potential lenders will know about your chapter 7 bankruptcy for 10 years : that’s how long it remains on credit reports (a chapter 13 bankruptcy remains on credit reports for only 7 years because there is partial payment of the debt, unlike in a chapter 7; see here for more information).

While this sounds like bad news, most of my clients receive offers from credit cards within a year of filing bankruptcy. And, if they pay their car loan or mortgage timely post-bankruptcy, thus improving their credit score, then other lenders will typically lend again with 1-2 years. Filing bankruptcy doesn’t mean you won’t get credit again; it simply means you’ll briefly loss access to credit and then it will be a bit more expensive to borrow. But — let me remind you — if you filed bankruptcy, your real problem is getting rid of your existing debt, not worrying about the price (interest rate) of taking on additional debt! Tackle the existing debt first.

Chapter 7 Bankruptcy Filing Sets the 341 Meeting of Creditors Date

As soon as a bankruptcy is filed, the debtor receives the date for their 341 Meeting of Creditors. This is the telephonic meeting with the Bankruptcy Trustee (the equivalent of the judge) request, typically set 4-6 weeks after the filing date, who interviews debtors on the particulars of their case. The Trustee has many cases scheduled for the same time, so a debtor can wait for up to hour until they’re “called”. Once their case is up, the Trustee spends from 5 to 20 minutes questioning the debtor. Read more about the 341 Meeting of Creditors here.

All creditors in every bankruptcy are allowed to attend this 341 meeting, and the Trustee will allow creditors to ask (limited) questions. Very few creditors appear at the 341 meeting; for example, credit card companies and medical practitioners, never show up — it’s less expensive to absorb the cost of the “bad debt” than to fight it. However, occasionally a debtor shows up, usually one with a personal stake, like a disgruntled business partner or landlord. However,  Trustees keep creditors on a very tight leash with respect to questions and comments. The 341 Meeting is not a forum for airing grievances (which is how many creditors who show up treat it), but rather a forum for ensuring all the requirements for bankruptcy are being met. A good bankruptcy attorney will not take a client into a 341 Meeting if s/he isn’t confident of being able to effectively rebut any creditor objections.

The Trustee sometimes asks for additional documentation during the 341 meeting. If so, then s/he will give a date by which  to produce the requested documents/answers. It’s usually within a few weeks to a month.

Chapter 7 Bankruptcy Filing Triggers the Requirement to Take Second Financial Management Course

After a bankruptcy petition is filed, the debtor has until two months after the 341 Meeting of Creditors to take a second Financial Management course (the first, Credit Counseling course is required to file the bankruptcy petition).

Chapter 7 Bankruptcy Filing Results in Formal Discharge of Debts Two-Three Months After 341 Meeting of Creditors

If a Trustee has no requests for additional documents at the 341 Meeting of Creditors, then it takes 60-90 days for the formal, legal discharge of debts to be issued. The Trustee must, by law, wait at least 60 days to issue the discharge. In practice it typically takes 60-90 days for the debtor to be formally declared debt-free.

Have questions about what happens before or after a Chapter 7 Bankruptcy is filed? Please call me! 818-889-8080.

February 21, 2023

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