What Happens During Bankruptcy?

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Although an individual can file for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, both types involve the same four steps, according to Money Crashers. These steps include providing a financial inventory, receiving credit counseling, attending a creditors' meeting and completing post-bankruptcy credit counseling. Most bankruptcy cases are handled through paperwork rather than court attendance.

Before filing for bankruptcy, a debtor creates a financial inventory that lists debts, income, expenses and property and other assets. Credit counseling must also be completed with a court-approved counselor. After filing, a creditors' meeting is held to discuss the exact terms of discharging or reorganizing the debt. When the terms are agreed to, the debtor must attend credit counseling again to prevent future bankruptcies, notes Money Crashers.

The type of bankruptcy being filed determines how the debt is handled. A Chapter 7 bankruptcy is also called a liquidation bankruptcy because it usually requires a debtor to liquidate assets to pay off some debt, according to FindLaw. Any remaining debt is discharged, or erased. Chapter 7 bankruptcy rules determine who can file for this type of bankruptcy, the type of debt that can be discharged and how to file, which can vary by state. A Chapter 13 bankruptcy is also called a reorganization bankruptcy, because it requires an individual to follow a structured repayment plan to pay off debts over time, notes FindLaw. This is typically within three to five years.