When debt gets out of control, bankruptcy can help you get back on your feet. Find out whether you can get a fresh start by answering these common bankruptcy questions:
The information below will help. You can also use the ten-question bankruptcy quiz to spot potential issues quickly. It works by flagging areas you'll want to look into further with a bankruptcy lawyer.
Filing for bankruptcy is serious business. It helps you get back on your financial feet fast. But, it can impact your credit score for up to ten years, so filing won't make sense unless you can get rid of a good amount of debt.
Out of all the things you should know about bankruptcy, we're covering this big question first.
Before you do anything else, check whether bankruptcy will wipe out (discharge) your debt. Credit card balances, medical bills, personal loans, back rent, gym memberships, payday loans, and utility bills all go away in bankruptcy. You can also erase mortgages, car loans, and other debt secured by collateral—but you'll have to return the house, car, or other property to the lender.
However, some debts don't go away. Child and spousal support obligations and recently incurred income tax bills are common examples of "nondischargeable debt." And the court won't discharge student loans unless you file a separate lawsuit and meet the requirements to win—something most people can't do.
Even if you have nondischargeable debt, bankruptcy might still be an option. In Chapter 7, you'll pay nondischargeable debt after your case ends, but it should be easier to do because you'll owe fewer debts.
Most Chapter 13 filers walk away debt-free because filers must pay nondischargeable debts in full through the Chapter 13 repayment plan. You won't have to fully pay long-term debts like mortgages or student loans. You'll still owe the balances after your case ends.
Everyone needs essential belongings to work and live. Although you won't lose everything in bankruptcy, you don't get to choose what to keep, either. Your state lists the items bankruptcy filers can protect in its bankruptcy exemption laws, although some states let filers use the federal bankruptcy exemptions if they'd protect more property. (You must pick one list or the other—you can't use exemptions from both lists.)
You'll use the same exemptions in both Chapters 7 and 13. But what will happen to your nonexempt property—things an exemption doesn't cover—is very different. In Chapter 7, you'd lose the nonexempt property, and the trustee appointed to manage your case would sell it and give the proceeds to your creditors. In Chapter 13, you don't lose nonexempt property. Instead, you have to pay creditors what it's worth through the repayment plan.
Review your state's bankruptcy exemptions to get a feel for the property you'd keep (state links are at the bottom). If your state isn't there, check Nolo's state bankruptcy exemption articles.
Not all debt problems are the same. Different chapters solve different issues, so we've outlined the key points below to help you get a sense of how each bankruptcy type works.
Tip for Business Owners: For the most part, businesses don't file for Chapter 7 or 13. Instead, consider Chapter 11 or Chapter 11 subchapter V for small businesses. Also, be sure that you understand that a personal filing could negatively affect your company and any partners you might have. Learn more about businesses in bankruptcy.
Sometimes it's easy to figure out whether you're qualified for bankruptcy. For instance, Chapter 7 debtors qualify if their gross income is less than the state's median income for the family's size. It's just a matter of simple math and checking a chart. If you don't pass that first hurdle, you'll have a second chance to figure in your expenses, but more factors come into play. Here's where you'll find out more about passing the means test and qualifying for Chapter 7.
Qualifying for Chapter 13 isn't ever simple, and because of the numerous complicated rules, you'll want to work with a bankruptcy lawyer. Until then, you can learn about the Chapter 13 repayment plan and get an idea about whether you make enough income to cover what you'll have to pay. Or try out this Chapter 13 repayment plan calculator. It's not perfect, but it will show you what you must pay (you might have to pay more).
Soon after you file your "petition" or bankruptcy paperwork, calls, letters, wage garnishments, and even collection lawsuits should come to a halt. It happens because of the "automatic stay" order the court immediately puts in place.
Next, the court will ensure the information in the petition is correct. You'll turn over bank statements, paycheck stubs, tax returns, and other documents for the bankruptcy trustee's review. All filers will attend a "341 meeting of creditors." At the meeting, the trustee will check your identification and ask questions about your filing. Creditors can appear and ask questions too, but they rarely do. Learn more about the Chapter 7 bankruptcy process.
Chapter 13 filers or counsel will also need to attend a confirmation hearing. The judge will review any objections to your proposed repayment plan and decide whether it meets all requirements necessary to be approved or "confirmed."
Filers must also complete two educational courses. You'll take the credit counseling course before you file your case. You must take a debt management class before you receive the discharge wiping out qualifying debt.
We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.