Bankruptcy is a legal process available to individuals or married couples who need help dealing with a large amount of debt. In a bankruptcy, you and your attorney work with a court and a trustee -- a person appointed by the court to administer the bankruptcy -- to pay off some of your debt and have the rest forgiven. As soon as you file for bankruptcy, you are granted an automatic stay, which stops creditors from harassing you and trying to repossess, foreclose or collect on the debt. At the end of the bankruptcy process -- which can take four months to five years, depending on which chapter you file under -- you will receive a bankruptcy discharge which effectively eliminates many debts.
Of course, there are drawbacks to bankruptcy. Filing for bankruptcy means making financial sacrifices – you may have to pay some of your income to debtors, and possibly sell off valuable assets. Another important drawback is that bankruptcy stays on your credit rating for seven to ten years. During that decade, it can be difficult to get anything that requires good credit -- from a home loan to a cell phone account. In addition, bankruptcy won’t wipe out certain types of debt, including alimony or child support debt, and can only help a little with student loans and tax debt. For these reasons, it’s important to talk to an experienced bankruptcy attorney before filing a bankruptcy.
Most individuals are eligible for one or two types of bankruptcies:
A Chapter 7 bankruptcy is available to people with a large amount of unsecured debt, such as credit card or medical bill debt. A trustee helps you decide which assets to “liquidize,” or sell off, to quickly pay off all the debt that you can. You may lose certain property, depending on your state, but generally, you won’t lose equity in your home, your retirement accounts, Social Security or most of your wages. Individuals who want to file for Chapter 7 bankruptcy must generally have middle-class or lower incomes. For more information, visit our page on the Chapter 7 bankruptcy process.
A Chapter 13 bankruptcy is designed for people with a steady income to draw on, who want to keep their homes and other large assets. Chapter 13 filers must have less than $307,675 in unsecured debt and less than $922,975 in secured debt. In this type of bankruptcy, a court approves a repayment plan that you set up with a trustee. You pay as much as the court feels you can afford to over three to five years, and the rest is eventually forgiven. Again, certain types of debt cannot be forgiven. For more information, visit our page on Chapter 13 bankruptcy.