The very first and the most immediate thing that happens when you file for bankruptcy is the stay order comes into effect. As such, if your home was going to be foreclosed or if you were going to be sued, Chapter 7 bankruptcy filing is going to put a stop to all of these. None of the creditors and the collection agencies can pursue you for collection or call you for the payments. Nobody can go on garnishing your wages or bank accounts, even if you were a defaulter and there was a judgment against you. Because bankruptcy is a legal proceeding, it is not only you but the creditors and lenders too who will be required to follow the laws with regard to bankruptcy.
Other Effects of Filing Bankruptcy
It is not the stay order which is the only outcome of bankruptcy, but it is one of the greatest advantages of filing Chapter 7 (and Chapter 13). However, there are various other effects that can both be advantageous and disadvantageous. Although it helps you discharge almost all or most of the debts, Chapter 7 is mainly about the liquidation of your assets. Therefore it is commonly termed as the liquidation process.
When you file bankruptcy under Chapter 7, the trustee is assigned with your case. The trustee analyzes your debts and determines your total debt amount. They then find out as to what assets you have, which would add up to quite an amount after liquidation. Through liquidation, your assets are sold off and then used to pay down your creditors. That means one of the effects of bankruptcy is loss of your assets.
Another effect is the debts get paid off or discharged. That is, as the assets are used to pay off the creditors and lenders, your assets may not be enough to pay down the debts in full. In that case, the lenders and creditors should comply with the situation. The balance is simply discharged. In most cases and as per state law, depending on the debt type, the creditors can no longer pursue you for the deficit amount. They are bound to follow the bankruptcy decree.
Negative Effect on Credit
With bankruptcy, although the debts get discharged and the creditors can no longer pursue you for payments, it has a highly negative effect on your credit. It gets listed on your credit report and is supposed to stay on it for 10 years. It lowers the credit score by at least 200 to 350 points and therefore, it becomes hard for you to obtain new credit (in any form), for the next 3 to 4 years. You will be required to work hard so that you can obtain new credit. That is, you will be required to improve the credit score by quite a few points before creditors will be willing to extend further credit.
This is what happens when you file for Chapter 7 bankruptcy. It helps you in one way but takes away the credit rating. It gives you the option to start afresh, but that is not easy. For more details, you can get the advice of a chapter 7 bankruptcy attorney