Bankruptcy Basics

What is Bankruptcy?

Bankruptcy can give you a fresh financial start by discharging (canceling) most of your debts. Bankruptcy also stops your creditors from taking actions to collect debts. Federal law guarantees the availability of bankruptcy protection, and all bankruptcies are filed in federal courts.

Benefits of Bankruptcy:

• Stop lawsuits
• Stop foreclosure
• Prevent repossession of a car or other property
• Stop wage garnishment
• Avoid judgment liens
• Stop harassing phone calls, letters, etc. from creditors
• The automatic stay (see below)
• Cancel legal obligation to pay most debts (see below)

How Will Bankruptcy Affect My Credit?

Unfortunately, there is no clear answer to this. A bankruptcy filing can stay on a credit report for up to 10 years. If you are contemplating filing bankruptcy, your credit may already be bad and bankruptcy may not make it significantly worse. In some situations, bankruptcy may allow you to improve your credit worthiness faster than you could have otherwise because most of your debts are cancelled. However, there is no guarantee you will be able to get new credit after filing, and it will probably take several years to rebuild your credit.

What Protection Does Bankruptcy Give Me?

Two of the most important aspects of bankruptcy are the automatic stay and the discharge.

The Automatic Stay

The automatic stay takes effect immediately upon filing bankruptcy, and requires that creditors immediately cease all collection activity. Creditors cannot make harassing phone calls or send demand letters. Creditors cannot continue a lawsuit or sell a property in foreclosure. If a creditor wants to take any of these actions after a bankruptcy is filed, a creditor must ask the Court for permission first, and the creditor will have to show good reasons why such permission should be granted.

The Bankruptcy Discharge

The discharge is usually granted at the conclusion of the case. Stated simply, the bankruptcy discharge causes all of your debts (with a few exceptions) to be canceled. For a Chapter 7 bankruptcy, debts excepted from discharge include most student loans, most taxes, child support, alimony, and debts for willful or malicious acts. The discharge in a Chapter 13 is broader and includes some of these items. Generally, however, the discharge does not remove liens on property. The discharge is probably the best benefit of filing bankruptcy (with the automatic stay a close second); it means that most, if not all, of your debts are wiped away.

What are the Types of Bankruptcy?

The three most common types of bankruptcy are Chapter 7, Chapter 11 and Chapter 13. (There are two additional types that are much less common: Chapter 9 (for municipalities) and Chapter 12 (for family farmers).)

Chapter 7 - Liquidation

Chapter 7 is known as "liquidation" bankruptcy. The Debtor is allowed to keep enough property to make a fresh start, and the remainder of the Debtor's property (if any) is liquidated to pay creditors. Chapter 7 is the most common type of bankruptcy and a discharge is often granted within 6 months of filing the bankruptcy petition.

Chapter 11 - Reorganization

Chapter 11 is primarily used by individuals and businesses with large assets and liabilities. In Chapter 11, a plan is proposed to repay creditors. While providing a great deal of flexibility, Chapter 11 is more expensive and more complicated than either Chapter 7 or Chapter 13.

Chapter 13 - Payment Plan

In Chapter 13, the debtor pays back at least part of debts owed through a payment plan that usually lasts 3 to 5 years. Chapter 13 provides some advantages over Chapter 7, including a broader discharge and the ability to pay mortgage arrearages (preventing foreclosure) through a Chapter 13 Plan.

What Type of Bankruptcy Should You File?

Each type of bankruptcy has its own advantages and disadvantages, and a thorough discussion of the merits of each is far beyond the scope of this page. While bankruptcy can provide effective debt relief, bankruptcy law contains many traps for the unwary. A competent bankruptcy attorney can help you avoid these traps. You should consult a bankruptcy attorney before deciding whether to file bankruptcy and what type of bankruptcy is right for you.