Financial stresses are a fact of life for many people, so if you find yourself in this situation, you are certainly not alone. When life happens and finances tighten for whatever reason, you may find yourself unable to pay all of your monthly bills despite your best efforts to make ends meet. When the situation doesn’t seem to have an end in sight, you may wonder about the feasibility of filing bankruptcy. But if you’ve never before considered such a move, you may be in the dark regarding what bankruptcy actually can and cannot do for you.
What, exactly, can bankruptcy do, and what are the things it cannot do? But before we get to that, let’s quickly review the two most common types of personal bankruptcy available to you.
Chapter 7 Bankruptcy
Chapter 7 is a bankruptcy option that eliminates some of your debt by liquidating your non-exempt assets and using those proceeds to pay off as much of your debt as possible. However, once those proceeds are exhausted, the remainder of your dischargeable debt is eliminated. There are certain types of debt that are not dischargeable, and they are listed below, but all other debt is forgiven in a Chapter 7 bankruptcy.
This option is popular for lower-income filers who don’t have many assets, but keep in mind that you must actually qualify to file Chapter 7. In order to qualify, you must take a means test that assesses your financial status. If your income is too high or you have too many assets, the courts will convert your Chapter 7 filing to a Chapter 13 bankruptcy and proceed from there.
Chapter 13 Bankruptcy
When people need to file bankruptcy but have a significant amount of assets, they may not want all of their assets liquidated. For instance, Tom may find himself unable to pay all of his bills, despite having assets. While he is willing to liquidate his boat, he really wants to hang on to his lake house and his second car. Tom may want to consider Chapter 13 bankruptcy, which will allow him to do just that.
In this type of filing, your attorney and the court will work out a payment plan wherein you repay much of your debt within a three to five-year period. The amount of the payments will be decided, as well as the distribution to creditors of the monies paid. Some creditors will be given priority and paid in full, while others may not. However, at the end of the repayment period, all remaining debts are discharged.
What Bankruptcy Can Do
Either of these bankruptcy options can lessen your current personal financial worries in a number of tangible ways.
Eliminate unsecured debt. Unsecured debt is where the creditor holds no collateral against your debt. In other words, you made no promise to return assets that were purchased through credit. Unsecured debt would be things like credit cards, medical bills, and even gym memberships.
Eliminate secured debt. Secured debt is where the creditor holds a security interest in the property purchased, as with the mortgage on your house or the loan for your car. When a debtor wants to erase debts such as these, they are required to return the property. The only other option would be to make specifically agreed upon arrangements between the debtor and creditor to save the asset from being liquidated during bankruptcy.
Stop evictions, repossessions, and foreclosures. While temporary in nature, the act of filing for bankruptcy will halt any evictions, repossessions, and foreclosures as long as they are still pending at the time the bankruptcy is filed.
Stop all collection activities. Once you file bankruptcy, all collection action against you must cease. This includes things like collection calls from creditors, threatening letters or emails, and wage garnishments. However, please keep in mind that collection efforts for things like child support payments (which cannot be waived or eliminated through bankruptcy) may continue.
What Bankruptcy Cannot Do
The U.S. Bankruptcy code has 19 different categories of debts that cannot be discharged in bankruptcy. Some of these vary by the type of bankruptcy filed. However, in general, the following are the most common debts not discharged in bankruptcy:
- Certain Types of Tax Claims
- Debts Not Listed in the Bankruptcy Filing
- Alimony and Child Support
- Debts from Willful and Malicious Injury to Persons or Property
- Governmental Fines and Penalties
- Student loans (there are exceptions)
- Personal Injury Debt from Driving While Intoxicated
- Debts Owed to Some Tax-Advantage Retirement Plans
- Certain Condominium or Cooperative Housing Fees
- Most Tax Debts
Remove a Lien
If you have a secured creditor, such as one for a car or a house, that creditor will put a lien on your property in order to collect. While bankruptcy will remove the debt, it will not remove the lien on your property. Because of this lien, if the debt remains unpaid after the automatic stay is lifted, the creditor has the right to repossess (car) or foreclose (house) on the property. This enables the creditor to sell the asset and recoup some of their losses.
Discharge Debt Related to Fraud (Maybe)
On rare occasions, a creditor may assert that you committed fraud in some way, like lying on your credit application or using borrowed assets as collateral. Here, the creditor must seek to convince the court that your debt should not be discharged.