Money & Debt

Bankruptcy is a legal process that lets you get rid of debts, stop creditor Someone who is owed money harassment, and start over financially. It is a federal court procedure. It is important to learn about the bankruptcy process before you file. A bankruptcy filing can affect your credit history for up to 10 years.

The person who files bankruptcy is the “debtor.” The person or business you owe money to is a "creditor."

Filing for bankruptcy protects you from debt collection activity. This is called an “automatic stay.” Bankruptcy can also eliminate most of your debts. The bankruptcy court decides which debts will be wiped out and that you no longer have to pay. These are called “discharged” debts. Creditors cannot try to collect discharged debts from you. Bankruptcy does not erase all debts. You usually still have to repay child support Money paid by a parent to help another parent support a minor child or an adult child with a disability , alimony, taxes,  some student loans, and debts incurred through fraud The deception of someone(s) with intent to cause damage (not including  forgeries and counterfeiting). .

There are many rules, and it can be extremely difficult to file for bankruptcy on your own. Talk to a lawyer before you file and use our tool to help you decide if bankruptcy is right for you.

Types of bankruptcy

Most people will choose between a Chapter 7 and Chapter 13 bankruptcy. These are the names of the chapters in the bankruptcy law that explain how each type works. The choice depends on your income and what property you would like to keep.

Chapter 7

In a Chapter 7 bankruptcy, many of your debts may be “discharged,” or canceled. This means you no longer owe them. This can happen as quickly as four months from when you file.

Most of your property is sold to pay off your debts. You may be allowed to keep some property. This is called “exempt" property.

To qualify for a chapter 7, you must have very low income and assets Anything a person owns that has financial value . Learn more about qualifying for bankruptcy.

Chapter 13

Chapter 13 requires you to repay as much debt as you can over three to five years.  This type of bankruptcy lets you keep most of your property. However, you must be able to make payments to qualify.  Learn more about qualifying for bankruptcy.

A judge must approve your plan. The court will accept your plan if you can cover your monthly expenses and pay your debts with your regular income. After the court confirms your plan, you pay the Chapter 13 trustee A person that has custody of or control over funds or items of another . The trustee pays your creditors. A Chapter 13 plan can last up to 60 months (5 years).

You must pay some debts in full during your plan. These include back taxes and child support and maintenance Money the court orders one spouse to pay the other spouse after their divorce (formerly called alimony) obligations. You also must pay secured debts, like mortgage A loan given by a bank that is used to help someone buy a home and car loans, if you want to keep your property. Some debts cannot be discharged in Chapter 13, just like in Chapter 7. When you finish your plan, you should be up to date on your secured debts, and any other debts will be discharged.

Once the repayment plan is completed, you will get a discharge of some of your remaining debts. You must still pay certain back taxes and any obligations in child support and maintenance in full during the plan. Also, some types of debts cannot be discharged.

You should try to get legal help if you can before you file for Chapter 13 bankruptcy. It is very hard to make a repayment plan without a lawyer. Most cases without a lawyer fail. You can file for Chapter 13 bankruptcy more often than Chapter 7. But if you have filed for bankruptcy before, you may have to wait two years or more to file again.

Reasons to file for bankruptcy

Here are some good things that might happen if you file for bankruptcy:

• In chapter 7, most debts are discharged (wiped out), giving you a fresh start,
• In chapter 13, you can save some of your property like a house or car,
• Bankruptcy stops most wage garnishments and harassment by collection agencies,
• Foreclosures and repossessions are stopped and cannot move forward unless the court allows,
• You can keep exempt property,
• You can stop utility shut-offs, or restore service after paying a reasonable deposit, then pay only for current service,
• Employers and public agencies cannot retaliate against you for filing bankruptcy, and
• If your driver's license was suspended for not paying a debt that is dischargeable in bankruptcy, you can get your license reinstated.

Reasons not to file for bankruptcy

Here are some reasons bankruptcy might not be a good idea for you:

• Bankruptcy stays on your credit report for 7 to 10 years or can negatively impact your credit rating,
• Getting credit may be harder or more expensive during or after a bankruptcy,
• It may cause strain in relationships with some creditors and cosigners,
• You may have to return property that is not paid for (chapter 13 can be used to save some additional property),
• Your personal financial information is made public,
• You may have legal defenses to your debts, so you don't have to pay them,
• You can only get a chapter 7 discharge once every eight years, and
• You may be able to protect your income and property without filing bankruptcy.

Also, the following types of debt will remain even after a bankruptcy:

• Unpaid child support payments,
• Unpaid maintenance or alimony payments,
• Unpaid fines,
• Student loans (usually),
• Most unpaid state and federal taxes,
• Criminal restitution orders,
• Debts due to fraud, theft The unlawful taking of property, money, or services from another person, business, or organization or embezzlement The misuse of money or property entrusted to one's care, custody, or control. ,
• Damages to another person caused by drunk driving or something done on purpose, and
• Debts from a property settlement in a divorce.

Finally, here is a list of things bankruptcy cannot do for you:

• Get rid of a security interest, such as a mortgage or security interest in a car,
• Stop an eviction, if the eviction court already entered an eviction order before the bankruptcy was filed,
• Protect cosigners, unless they also file for bankruptcy,
• Release you from debts that you took on shortly before the bankruptcy case was filed,
• Discharge debts that you take out after the bankruptcy is filed,
• Discharge debts the court decides you can afford to pay if you have enough income, and
• Allow you to keep valuable certain property, such as, for example, a vacation home, an RV, or expensive jewelry.

Bankruptcy usually won’t help if you’re collection proof

Filing for bankruptcy will usually not help you if you are collection proof. Creditors can ask for payments, but they cannot take any of your income or belongings if you are collection proof. You are a collection proof debtor if all of the following are true:

• You have no income, your take-home pay from work is below 45 times the state minimum wage per week, or your income is only from a protected source like public benefits, child support or Social Security.
• You either do not own a home, or own a home with less than $15,000 in equity Amount that is left after a person pays off their loan . Equity is the difference between how much is owed on the mortgage and how much the house is worth right now.
• You either do not own a car, or own a car with less than $2,400 in equity.
• You do not have personal property, including money in bank accounts, worth more than $4,000.

If you are a collection proof debtor, you do not need bankruptcy to stop debt collectors from contacting you. You can use our Letter from Collection Proof Debtor to ask the debt collectors to stop contacting you.

Bankruptcy while married

If you are married, you don't have to file a joint bankruptcy with your spouse. You can choose to file for bankruptcy alone. However, you still have to include your spouse's income on some bankruptcy forms. Additionally, if you file alone and your spouse cosigned on your debts, your spouse will still be responsible for the repayment of those cosigned debts. 

Timing is important

Often there will be a reason to act quickly, such as a court date or a deadline in a legal document. Such that if you were to miss the court date or deadline you may have to pay - even though you had a legal defense. If you wait too long before filing bankruptcy you may not be able to get the full benefit of a bankruptcy. For example, if you wait until a court judgment An official decision by a court that ends the dispute between parties is entered against you.

Sometimes it is better to wait to file a bankruptcy. Sometimes doing very little or nothing right now is the best option. But waiting should be the result of an informed, conscious process, not because of fear or indecision.