According to the American Bankruptcy Institute over 800,000 Americans filed for bankruptcy in 2015. So what is bankruptcy, what does bankruptcy do, and what are its limits?
What is Bankruptcy?
Bankruptcy is the legal term for when a person or business becomes unable to repay their debts. Bankruptcy helps those who can no longer pay their debts get a new start by either liquidating their assets or creating a repayment plan that they will be able to follow. Many unsecured debts can be discharged through filing for bankruptcy.
When you file for bankruptcy, the court mandates an “automatic stay” which stops most creditor calls, wage garnishments, and lawsuits. It can also temporarily stop an eviction, a foreclosure, or repossession. Depending on what type of bankruptcy you file for, you may still be evicted or have your assets repossessed when the automatic stay is lifted.
What Are the Types of Bankruptcy?
The two most commonly filed types of bankruptcy are Chapter 7 or Chapter 13. Filing for Chapter 7 bankruptcy involves liquidating any non-exempt assets to pay back your unsecured debts. Exempt property includes anything necessary to maintain a household, such as a house, clothing, and a personal vehicle. Once the non-exempt assets have been liquidated, the remaining unsecured debts are disposed of. If you can’t bring the account current on a home undergoing foreclosure, you may still lose the house when the automatic stay is lifted.
Chapter 13 debt is typically filed by those with a higher income. If you have enough income to pay at least something back to creditors, you may be eligible for Chapter 13 bankruptcy. Chapter 13 allows you to create a debt repayment plan that is reasonable for your income. Chapter 13 debtors are allowed to keep all nonexempt property, because they will be repaying their creditors.
What Debts Can’t Be Wiped Out by Filing For Bankruptcy?
Though most unsecured debt (i.e. credit card debt, medical bills, personal loans, and gym contracts) can be eliminated through bankruptcy, there are certain types of debts that can’t be eliminated by filing for bankruptcy. These debts include:
- Child support and alimony obligations- you will be required to repay these as though you had never filed for bankruptcy
- Student loans- unless you can prove that it will cause you undue hardship to repay
- Most tax debts
Bankruptcy also can’t prevent a secured creditor from foreclosing or repossessing property that you can’t afford.
Bankruptcy has long-term financial and legal consequences. A chapter 7 bankruptcy will remain on your credit report for 10 years. A chapter 13 bankruptcy will remain on your credit report for 7 years. Potential creditors will see this and you will be unable to obtain credit. Due to this, we highly recommend you consult with a knowledgeable bankruptcy lawyer to determine the best action for you.