WHAT IS BANKRUPTCY
Bankruptcy is a legal proceeding in which a person who can not pay his or her bills has the opportunity to get a fresh financial start. The right to file for bankruptcy is provided by federal law and was originally established as part the U.S. Constitution. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, including putting an immediate end to harassing telephone calls, letters, wage garnishment, foreclosure proceedings and/or bank account freezes.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
• Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.
• Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without making future payments.
• Prevent repossession of a car or other property and even force the creditor to return property after it has been taken.
• In certain circumstances, a Chapter 13 bankruptcy can convert a second mortgage on your primary residence from secured to
unsecured and allow you to only pay a portion of the balance.
• Stop wage garnishment, bank account freezes, harassment and similar creditor actions to collect a debt.
• Restore or prevent termination of utility services.
• Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
What Bankruptcy Can Not Do
Bankruptcy can not, however, cure every financial problem. Nor is filing bankruptcy the right step for every person. In bankruptcy, it is usually not possible to:
• Eliminate certain rights of “secured” creditors. A creditor is “secured” if it has taken a mortgage or other lien on property as collateral for a loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments
over time in a Chapter 13 bankruptcy and bankruptcy can eliminate your obligation to pay any additional money on the debt if
you decide to give back the property. But you generally can not keep secured property unless you continue to pay the debt.
• Discharge certain types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, most student loans, court restitution orders, criminal fines and most taxes.
• Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
• Discharge debts that arise after bankruptcy has been filed.
What Different Types of Bankruptcy Cases Should I Consider?
There are four types of bankruptcy cases provided under the law:
• Chapter 7 Bankruptcy, also known as straight bankruptcy or liquidation, is the simplest, most straightforward form of
bankruptcy and is a legal excuse from paying most unsecured debts, such as credit cards and personal loans. Generally, those who file Chapter 7 keep all of their property and generally do not have to pay any of their debt back.
• Chapter 11, known as “reorganization,” is used by businesses and a few individuals whose debts are very large.
• Chapter 12 is reserved for family farmers and fishermen.
• Chapter 13 Bankruptcy is a type of “reorganization” used by individuals to pay all or a portion of their debts over a period of three or five years using their regular monthly income. Chapter 13 can be used to catch up on past-due mortgage or car payments, pay back income taxes or provide temporary relief from student loans, all while eliminating credit card and other unsecured debts.
Most individuals filing bankruptcy will choose to file under either chapter 7 or chapter 13.
Read more about filing bankruptcy in our Do I Qualify for Bankruptcy section.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
• Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.
• Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without making future payments.
• Prevent repossession of a car or other property and even force the creditor to return property after it has been taken.
• In certain circumstances, a Chapter 13 bankruptcy can convert a second mortgage on your primary residence from secured to
unsecured and allow you to only pay a portion of the balance.
• Stop wage garnishment, bank account freezes, harassment and similar creditor actions to collect a debt.
• Restore or prevent termination of utility services.
• Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
What Bankruptcy Can Not Do
Bankruptcy can not, however, cure every financial problem. Nor is filing bankruptcy the right step for every person. In bankruptcy, it is usually not possible to:
• Eliminate certain rights of “secured” creditors. A creditor is “secured” if it has taken a mortgage or other lien on property as collateral for a loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments
over time in a Chapter 13 bankruptcy and bankruptcy can eliminate your obligation to pay any additional money on the debt if
you decide to give back the property. But you generally can not keep secured property unless you continue to pay the debt.
• Discharge certain types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, most student loans, court restitution orders, criminal fines and most taxes.
• Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
• Discharge debts that arise after bankruptcy has been filed.
What Different Types of Bankruptcy Cases Should I Consider?
There are four types of bankruptcy cases provided under the law:
• Chapter 7 Bankruptcy, also known as straight bankruptcy or liquidation, is the simplest, most straightforward form of
bankruptcy and is a legal excuse from paying most unsecured debts, such as credit cards and personal loans. Generally, those who file Chapter 7 keep all of their property and generally do not have to pay any of their debt back.
• Chapter 11, known as “reorganization,” is used by businesses and a few individuals whose debts are very large.
• Chapter 12 is reserved for family farmers and fishermen.
• Chapter 13 Bankruptcy is a type of “reorganization” used by individuals to pay all or a portion of their debts over a period of three or five years using their regular monthly income. Chapter 13 can be used to catch up on past-due mortgage or car payments, pay back income taxes or provide temporary relief from student loans, all while eliminating credit card and other unsecured debts.
Most individuals filing bankruptcy will choose to file under either chapter 7 or chapter 13.
Read more about filing bankruptcy in our Do I Qualify for Bankruptcy section.