Everything you need to know about bankruptcy in the USA: what debts will be written off, what will not, and what will happen to the property taken on credit

Bankruptcy is a powerful tool for debtors, but it does not solve all problems. What happens when you file for bankruptcy and how bankruptcy can help you improve your financial situation NOLO.

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When faced with financial difficulties, it is important to know what happens in the event of bankruptcy before deciding whether to file for bankruptcy. There is no doubt that if you are experiencing serious debt problems, filing for bankruptcy can be a powerful remedy. Bankruptcy stops most lawsuits, wage garnishment, and other collection activities. It eliminates many types of debt, including credit card balances, medical bills, personal loans, and more.

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But bankruptcy does not stop all creditors and does not erase all obligations. For example, you will still have to pay student loans if you can't prove you're in trouble. You will need to pay back child support, spousal support and most tax debts.

What happens when you file for bankruptcy

Bankruptcy allows people struggling with debt to get rid of certain obligations and start a new life. The two main types of filed bankruptcies (Chapter 7 and Chapter 13) offer unique benefits and, in some cases, treat debt and property differently. The chapter that's right for you will depend on your income, assets, and goals.

Bankruptcy can stop creditor harassment and debt collection activities

Under the Fair Debt Collection Practices Act, you can send a letter asking the collection agency to stop communicating with you. All employees of the agency will be prohibited from contacting you except to inform you that collection work has ceased, or that the collection agency or the original creditor intends to sue you or seek some other remedy.

Keep in mind that this remedy only applies to manifolds. Creditors may continue to contact you (with the exception of some states that extend this remedy to the original creditor and collection agencies).

When you file an application, the court issues an order called an automatic stay.

The suspension slows down most calls from creditors, as well as the seizure of wages and lawsuits, but not all. For example, creditors can still collect child support and spousal support, and criminal cases will continue.

Bankruptcy has the power to stop foreclosures, foreclosures, or evictions (at least temporarily).

Auto-stop will slow down these actions while they are not yet completed. Once completed, bankruptcy will not help.

Eviction. The eviction, which is still in litigation, will be stopped after filing for bankruptcy. But the residence is likely to be temporary. Keep in mind that if your landlord already has an eviction order against you, bankruptcy won't help in most states.

Redemption and return of ownership. While automatic suspension will stop a foreclosure or foreclosure, filing a Chapter 7 application will not help you keep your property. If you fail to activate the account, you will lose your home or car after the seizure is lifted. Whereas Chapter 13 has a mechanism to let you catch up on past payments so you can keep the asset.

Bankruptcy can pay off credit card debt and most other non-priority unsecured debts.

Bankruptcy is very well suited for erasing most non-priority unsecured debts other than school loans. For example, you can pay off unsecured credit card debt, medical bills, late utility bills, personal loans, gym contracts, and more.

The debt is unsecured if: you have not promised to return the purchased property until you paid the bill. On the contrary, if you have a secured credit card, you will have to return the purchased item. Jewelry, electronics, computers, furniture, and large appliances are often secured debts. Read your receipt or loan agreement to find out.

Bankruptcy can pay off the secured debt (but you will have to give up the purchased property).

If you can't afford a payment secured by collateral, such as a mortgage or car loan, you can pay off your debt in the event of bankruptcy. But you won't be able to keep your house, car, computer, or other loan-repayment items. When you voluntarily agree to secure a debt with property, you are obligated to pay what you owe or return the property.

What Chapter 13 Bankruptcy Can Do

Each of Chapter 7 or 13 offers unique solutions to debt problems. The two types of bankruptcy work very differently. For example, how quickly your debt will be paid off depends on which chapter you are filing:

Chapter 7 takes an average of three to four months to complete.

If you are applying under Chapter 13 instead of Chapter 7, you will likely have to pay off some of your unsecured debt under a three to five year repayment plan. However, any unsecured balance of debt remaining after the completion of your repayment plan will be repaid.

Chapter 7 is primarily for low-income applicants, so it will not help you keep your property if you are behind on payments. But if you have enough income to pay your creditors something, you can take advantage of the extra benefits offered by Chapter 13.

If you think you will soon run into significant debts, such as medical bills or unpaid rent, it may be wiser to wait until you file for Chapter 7 bankruptcy. won't get away.

Also, it's not possible to declare Chapter 7 bankruptcy again within eight years, so you'll be on the hook for those debts for a long time to come.

What Chapter 13 can do:

Stop recovery of a mortgage loan. Filing for Chapter 13 bankruptcy will stop foreclosure and force the lender to accept a plan that will allow you to make up missed payments over time. You must demonstrate that you have enough income to pay past due amounts and be aware of future payments for this plan to work.

Save the property not protected by bankruptcy relief. No one gives up everything they own when they go bankrupt. You can keep the (exempt) items you will need for work and life using the bankruptcy exemption. Under Chapter 7 bankruptcy, you ask the bankruptcy court to "pay off" or write off most of your debts. In exchange for this payment of qualifying debts, the liquidator in charge of your case may take any property you own that is not exempt, sell it, and distribute the proceeds to your creditors, but not a Chapter 13 claimant, says NOLO. It may seem that in this way you will save more assets, but this is not so. Claimants under Chapter 13 pay creditors the value of any ineligible property under the repayment plan.

What property is exempt from the fee depends primarily on state law. Generally, exceptions protect some share in your home and car, pension funds, social benefits, and most household items, furniture, essential clothing, appliances, and books.

«Reduce» secured debt, where the value of the property is less than the amount owed. Chapter 13 provides a procedure for reducing a liability to the replacement value of the property securing it. Let's say if you owe $10 on a car loan and the car is only $000, you could offer a plan that pays the lender $6 and pays off the rest of the loan. However, there are exceptions. For example, you can't pay off your car debt if you bought it within 000 months before bankruptcy. In addition, applicants cannot use the reduction provision to reduce their home mortgage.

What Bankruptcy Can't Do

Bankruptcy does not prevent a secured debt lender from foreclosing or seizing property that you cannot afford. Exemption eliminates debts, but does not eliminate liens. A lien allows the lender to take the property, sell it at auction, and use the proceeds to pay off the loan. The pledge remains on the property until the debt is repaid.

If you have secured debt (debt for which the lender has a lien on your property), bankruptcy may eliminate your obligation to pay the debt. However, this will not remove the lien on the property - the lender can still collect the lien. For example, if you are applying under Chapter 7, you can cancel your mortgage. But the lender's pledge will remain on the house. As long as the mortgage remains unpaid, the lender can exercise their lien rights to foreclose on the home after the automatic suspension is lifted.
Bankruptcy does not remove obligations for alimony for children and spouses.

Child support obligations remain in effect after bankruptcy, so you will continue to pay these debts in full as if you never filed for bankruptcy. And if you're using Chapter 13, you'll have to pay off those debts in full as part of your plan.

Bankruptcy does not cancel student loans, except in certain circumstances. Student loans can only be repaid in bankruptcy if you can prove that repaying the loan will cause you "unreasonable hardship", which is a very rigid standard. You must prove that you cannot afford to pay the loans at the present time and that it is very unlikely that this will be possible in the future.

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Bankruptcy does not eliminate most tax debts. Eliminating tax debt in bankruptcy is not easy, but it is sometimes possible for older outstanding tax debts.

Bankruptcy does not eliminate other outstanding debts.

The following debts are not repayable under any of the Chapter:

• debts you forgot to list on your bankruptcy filings
• debts for bodily injury or death resulting from drunk driving
• fines and penalties imposed as punishment, such as traffic fines and criminal damages.

If you apply under Chapter 7, these debts will remain when your case is completed. Under Chapter 13, you will pay off these debts in full as part of your repayment plan.

Fraud-related debt can be repaid. Bankruptcy will not pay off the fraudulent debt if the creditor files a lawsuit, called adversarial litigation, and convinces the judge that the obligation should remain in place after your bankruptcy. Such debts may arise due to false information in a loan application or the issuance of borrowed property as one's own to be used as collateral for a loan.

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