Should I File for Bankruptcy FAQ
Deciding if bankruptcy is right for you? Here are answers to your most common questions.
Will all of my debts be canceled in bankruptcy?
It depends on the type of debt you have. Bankruptcy is a good vehicle for eliminating credit card, medical debt, deficiencies resulting from a repossession or foreclosure, and other unsecured debt. In a Chapter 7 bankruptcy, this debt is discharged at the end of your bankruptcy. In Chapter 13 bankruptcy, you may have to pay off a portion of your unsecured debt through your repayment plan. Keep in mind that if you have debts secured by property (such as your home or car), the cancellation of the debt does not mean you get to keep the property. To learn what happens to secured property in bankruptcy, see Nolo's article Bankruptcy FAQ (Chapter 7 and 13).
Some debt is never discharged (canceled) in bankruptcy including child support and spousal support arrears, student loans (except in very limited circumstances), and tax debts first due within the previous three years. To learn more about which debts can be wiped out in bankruptcy, see Nolo's article What Bankruptcy Can and Cannot Do.
If I file for bankruptcy, can I keep my property?
If you file for Chapter 13 bankruptcy, the answer is yes. In Chapter 13 bankruptcy, you repay all or a portion of your debts through a repayment plan over a period of three to five years. In exchange, you may keep your property (including your car and home), assuming you keep up with payments on any loans secured by the property and keep making your repayment plan payments. Your plan will also have to ensure that your creditors will get as much through the Chapter 13 bankruptcy as they would have received in a Chapter 7 bankruptcy. For instance, if you own non-exempt real estate valued at $10,000, your plan will have to pay your unsecured creditors at least $10,000 (less costs of sale and the trustee's commission). (To learn more about Chapter 13 bankruptcy, see Nolo's Chapter 13 Bankruptcy section.)
In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection, sell it, and distribute the proceeds to your creditors. What property is exempt from collection depends primarily on state law. Typically, exemptions include some equity in your home and car, retirement funds, public benefits, and most household goods, furniture, furnishings, clothing (other than furs), appliances, books, and musical instruments. (To learn more about Chapter 7 bankruptcy, see Nolo's Chapter 7 Bankruptcy section.)
I'm facing foreclosure and want to keep my home. Is bankruptcy my best option?
Filing for Chapter 13 bankruptcy can be a good way to save your home from foreclosure. Chapter 13 bankruptcy lets you pay off a mortgage "arrearage" (late, unpaid payments) over the length of a repayment plan that is approved by the court usually between three and five years. In order for this option to work, you'll need enough income to at least meet your current mortgage payment at the same time you're paying off the arrearage. (To learn more about saving your home through Chapter 13 bankruptcy, see Nolo's article Your Home in Chapter 13 Bankruptcy.)
In Chapter 7 bankruptcy, if you have sufficient equity in the home, the bankruptcy trustee may sell your home to repay unsecured creditors. Given the state of the real estate market, this rarely happens these days. But if you're behind on your mortgage payments, Chapter 7 doesn't provide a way for you to catch up, and the lender will likely get permission from the bankruptcy judge to go ahead with a foreclosure. (To learn what happens to your home in Chapter 7 bankruptcy including how to determine if you have non-exempt equity see Nolo's article Your Home in Chapter 7 Bankruptcy.)
If your only goal of bankruptcy is to save your home, be sure to consider other alternatives first. You may be able to negotiate with your lender to deal with arrearages or get government help to modify your loan terms. To learn more about ways to save your home, see Nolo's article How to Avoid Foreclosure.
I'm in over my head with debt, and I just lost my job, meaning more debt to come. Should I file for Chapter 7 bankruptcy?
If you think you'll incur significant debts in the near future, it might make sense to wait to file for Chapter 7 bankruptcy. Although your current debts (with some exceptions) will be discharged in your bankruptcy, debts incurred after you file for bankruptcy won't be. Because you can't file for bankruptcy for eight years after the filing date in a previous Chapter 7 discharge, you'll be on the hook for those debts for a long time. To learn about other situations in which it makes sense to delay your bankruptcy filing, see Nolo's article Should I File Bankruptcy Now or Wait?
Debt collectors won't leave me alone! Will bankruptcy stop the harassment?
Yes, bankruptcy's automatic stay requires most creditors and debt collectors to stop all collection efforts against you until the bankruptcy is over. (To learn more about the automatic stay, see Nolo's article How Bankruptcy Stops Your Creditors: The Automatic Stay.)
But if all you want to do is stop debt collectors from contacting you, there is an alternate route. Under the Fair Debt Collection Practices Act, you can request that debt collectors stop contacting you. Simply send a letter stating that you want the collection agency to cease all communications with you. All agency employees are then prohibited from contacting you except to tell you that collection efforts have ended or that the collection agency or original creditor intends to sue you or take advantage of some other legal remedy.
Keep in mind that this remedy only applies to debt collectors. Creditors can continue to contact you (except in some states that extend this remedy to the original creditor as well as collection agencies). To learn more about dealing with debts and debt collection agencies, see Nolo's Debt & Collection Agencies section.
To Learn More
For clear-cut answers, information and strategies you need to figure out whether bankruptcy is the right solution for your debt problems, see The New Bankruptcy: Will It Work for You?, by Stephen Elias (Nolo).