A court examines your debt, expenses and income to determine if you can afford to pay what you owe. A trustee may sell non-exempt assets if you cannot.
Bankruptcy can help you get back on track financially. But it can also have negative consequences for your credit history. You should only consider bankruptcy if you have tried and failed to make a dent in your debts with other debt-relief options.
What is Bankruptcy?
Bankruptcy is a legal status that allows individuals and businesses to clear debts they can’t pay. It stops collection calls, foreclosures and wage garnishments. It also erases some types of debt, including credit card balances and medical bills. Bankruptcy does, however, stay on your credit report for 10 years and may lower your scores significantly.
The most common type of bankruptcy for individuals is Chapter 7 bankruptcy, which liquidates your assets (including property and excess income) to pay your creditors. This bare-bones option erases qualified consumer debt and usually is completed in four months or less.
It is recommended that you consult with an experienced attorney before filing for any bankruptcy. It’s easy to make mistakes in the complex paperwork, which could cause your case to be dismissed. You can find attorneys through your state bar association and some provide pro bono services. You can also get help through free or low-cost programs provided by your local bankruptcy court.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy, also known as a “straight” bankruptcy, involves liquidating your nonexempt property to pay creditors in exchange for eliminating most types of debt. This includes credit card debt, medical bills and personal loans. However, filing for Chapter 7 bankruptcy does not erase secured debt like mortgages or car loans, and it doesn’t erase alimony or child support obligations.
The trustee overseeing your bankruptcy case sells any of your nonexempt property to pay off creditors, but the majority of people are able to keep all their property since most assets are covered by state and federal bankruptcy exemptions. This includes your home, vehicles and tools needed for work, such as a toolbox.
Once the process is complete, most unsecured debts will be discharged and you will be free to start rebuilding your credit. This can lead to a renewed sense of financial security, especially if you are able to get serious about budgeting, saving and rebuilding your credit score with a secured credit card.
Chapter 13 Bankruptcy
Known as “wage earner bankruptcy,” Chapter 13 is designed to give debtors with
steady income, some breathing room. While it will require you to pay back some debt over the course of three to five years, it will stop collection attempts and allow you to keep your property (like your home, car and tools for work) as long as they are deemed “necessary” for your daily living.
Additionally, it may be possible to catch up on secured debts like mortgages and car loans through your repayment plan, as well as extend the terms of certain debts like student loan payments. It also has a provision that protects co-signers on consumer debt from being forced to pay a creditor.
Can I File for Bankruptcy?
The decision to file for bankruptcy is a major one with lasting effects. It is best made after discussing it with a credit counselor and a Harrisburg bankruptcy lawyer experienced in bankruptcy law.
Bankruptcy has many rules and exceptions that affect who can file, which debts are erased, and what property you can keep (called exempt property). For example, it cannot wipe out some types of tax debt, student loans, alimony or child support obligations and secured debts like car and home loan payments.
People file for bankruptcy for a variety of reasons, including excessive credit card use after a divorce or other financial missteps, expensive medical bills and loss of employment. Unlike other debt-relief options, bankruptcy eliminates some of your most burdensome obligations and provides a fresh start. It also halts foreclosure, repossession and wage garnishment for most debtors while you are preparing your case. However, a bankruptcy will remain on your credit report for 10 years.
