Personal bankruptcy is a process used by individuals to escape burdensome debt. Chapter 7 and Chapter 13 bankruptcy are the two most regularly used by people wanting a fresh financial start. Below, you'll learn about the benefits of filing for personal bankruptcy, including its ability to stop collection actions like creditor calls and letters, vehicle repossessions, wage garnishments, foreclosures, and lawsuits seeking monetary reimbursement.
How Personal Bankruptcy Stops Collection Activity
When you file for bankruptcy, the court issues an injunction order known as an “automatic stay” that prohibits creditors from contacting you. An automatic stay is a powerful tool. It stops debtors from sending letters or calling you. It also stops your house from being sold at auction, prevents your employer from deducting wages from your paycheck, and excuses you from mandatory attendance at depositions and other debt collection lawsuit appearances.
How Long the Automatic Stay Lasts in a Personal Bankruptcy
Even though filing for bankruptcy stops creditors in their tracks, it doesn’t fix all problems, and the reprieve might be temporary. For instance, a lender can ask the court for permission to “lift the automatic stay” and continue with a foreclosure sale, repossession, or lawsuit. The court will likely grant a mortgage or auto lender’s request if the filer can’t bring the payments current and the property lacks equity that could be used to cover the missed payments.
Debts Personal Bankruptcy Wipes Out
Getting out of debt is the primary reason people file for personal bankruptcy. However, not all debts go away in bankruptcy. Some of the most common debts eliminated or "discharged" in bankruptcy include:
- credit card bills
- medical bills
- utility bills
- personal loans, such as payday loans
- gym memberships, and
- mortgages and auto payments, but you'll need to return the property.
Filing for bankruptcy won’t relieve you of past-due domestic support obligations, such as spousal or child support arrears. Additionally, most back taxes, student loans, and fines and penalties owed to the government can't be discharged in bankruptcy.
Learn more about debts you’ll likely remain responsible for after Chapter 7 and pay fully in Chapter 13 in Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.
How Personal Bankruptcy Chapters 7 and 13 Work
Before filing for bankruptcy, you'll choose which bankruptcy chapter is best for you. Chapters 7 and 13 have different qualification requirements and the ability to solve particular debt problems. The chapter you choose will likely depend on the following factors:
- the debt that you owe,
- how much money you make, and
- the amount of property you own.
Chapter 7 filers can discharge qualifying debt in about four months without paying into a monthly repayment plan. People with lower incomes are usually eligible for Chapter 7 bankruptcy. Some higher-income people qualify if their income is offset by allowed expenses. Eligibility is determined by taking the Chapter 7 means test.
Higher-income earners, or those who don't want to give up property they'd lose in Chapter 7, use Chapter 13. They must pay back a portion of their debt over the course of a three- to five-year Chapter 13 repayment plan.
Protecting Property in Bankruptcy Chapters 7 and 13
Everyone can use bankruptcy exemptions to protect needed property in Chapters 7 and 13. Protected property varies by state but usually includes household goods and clothing, some equity in a home and car, and a qualifying retirement account. Learn more about what you can keep if you declare personal bankruptcy.
One downside of Chapter 7 is that the bankruptcy trustee assigned to the case sells "nonexempt" property that isn't protected by an exemption. By contrast, retaining nonexempt property in Chapter 13 can be costly. Chapter 13 filers must pay an amount equal to the nonexempt property to keep it.
If you’re unsure which chapter is right for you, consult a local bankruptcy attorney. You can learn how to maximize your consultation time by reading Bankruptcy: Preparing to Meet with a Lawyer.
Questions for Your Attorney
- Would filing for bankruptcy help resolve my financial problems?
- Which bankruptcy chapter would best fit my needs?
- Will I have to pay my bills through a Chapter 13 repayment plan?