Frequently Asked Questions About Bankruptcy
Considering bankruptcy can be frightening, but in some cases it may be the best solution to your financial problems.
The goal of bankruptcy is to give you a fresh start, allowing you to manage your finances, and not suffer a lifetime of crushing debt.
Our commitment at consumerbankruptcycounseling.info is to give you the information you need to make smart decisions. On the page below you'll find many commonly asked questions about bankruptcy. Just click the questions to see the answers!
Please bear in mind that the information provided on this site does not constitute legal advice. Use of this site does not establish an attorney/client relationship. For questions regarding your specific legal situation you should consult a qualified attorney.
Bankruptcy is a legal process which allows a consumer or business to eliminate, reduce, or reschedule their debts. It may prevent creditors from taking further actions to collect debts.
There are some debts, such as student loans and child support payments, which generally cannot be eliminated or reduced by bankruptcy.
There are three primary types of bankruptcy available to consumers: Chapter 7, Chapter 13, and Chapter 11.
Chapter 7: Liquidation. In order to apply for Chapter 7 bankruptcy, your household income must be below the median income for a family of your size in your state. Some of your possessions will be sold to pay your creditors. However, you will be allowed to keep some of your possessions, including clothes, household furnishings, and possible equity in your car and home. The specific items you can keep, called exempt property, are determined by state laws. If you owe money on personal property (such as a car), you may be given a choice of paying off the loan or allowing the property to be repossessed.
After a Chapter 7 bankruptcy, your remaining debts are eliminated, and you do not need to repay them. (Some debts, such as income taxes, student loans, or child support, generally cannot be eliminated.)
Chapter 13: Repayment. In a Chapter 13 bankruptcy, your debt payments are rescheduled, typically over a 3- to 5-year period. Some debts may be reduced. You may keep your personal property, provided you can continue to make payments on outstanding loans, if any.
Chapter 11: Reorganization. Chapter 11 bankruptcy is typically used by businesses. It allows the business to continue to operate, and "restructures" the business operations and debt, under court supervision, to allow creditors to be paid.
Although consumers can file for Chapter 11 bankruptcy, it is complicated and expensive, so it's generally not a good option. It may be worthwhile if you own substantial real estate or other property that would otherwise be liquidated.
Under Chapter 7 bankruptcy, you can keep items that are considered exempt under your state laws. This generally includes clothing, household furnishings, personal items, tools required for your work, your cars and your home (provided you can continue to make payments).
Under Chapter 13 bankruptcy, you can keep your property even if it is not considered exempt, provided you are able to make payments under your court-approved repayment plan.
Under Chapter 7 bankruptcy, most of your debts will be eliminated. Some debts, such as federal taxes, student loans, and child support, generally cannot be eliminated.
Under Chapter 13 bankruptcy, your debts may be reduced or rescheduled, but you will need to pay them off over a 3- to 5-year period, following a court-approved repayment plan.
Under current laws (as of 2016), student loans generally cannot be eliminated under Chapter 7 or Chapter 13 bankruptcy.
However, you may be able to have your student loans eliminated if you can show that paying them off would cause "undo hardship." In practice, this is difficult, so often debtors do not apply to have their student loans eliminated, or discharged. However, in cases where a student loan discharge was requested, the request was granted 40% of the time. If you have substantial student loans, you should find an attorney who has successfully applied for a student loan discharge.
Under Chapter 7 bankruptcy, some federal and state income taxes may be eliminated, or discharged. In general taxes may be discharged only if they are 3 or more years overdue. Other taxes, such as payroll tax, cannot be discharged.
In order to qualify for Chapter 7 bankruptcy, you must show that your income over the most recent 6 month period falls below the median income for a similar household in your state. This is called the "means test." Data on median incomes is maintained and published by the US Department of Justice, and can be found at: https://www.justice.gov/ust/means-testing.
There is no income limit to file for Chapter 13 bankruptcy.
A Chapter 7 bankruptcy stays on your credit record for 10 years.
A Chapter 13 bankruptcy stays on your credit record for 7 years.
You may find it very difficult to get credit after a bankruptcy, because your credit score will go down significantly.
Bankruptcy will have a serious negative affect on your credit score: anywhere from 150 to 220 points. The more accounts included in a bankruptcy filing, the greater the impact. However, unpaid bills and collections also affect your credit score, and bankruptcy may allow you to put your financial problems behind you and start to rebuild your credit score.
You can improve your credit score after bankruptcy by rebuilding your credit, starting with "secured" credit cards, and diligently staying current on your payments.
Avoiding bankruptcy starts with a detailed budget, to understand where your money is going, and identify places you can save.
You can reduce your payments in several ways: loan consolidation, debt negotiation, and debt management. You may also be able to take out a secured loan, such as a home equity loan, to pay off high-interest loans.
Yes. If one spouse files for bankruptcy, that person's debts can be discharged. However, the other spouse still owes his or her individual debts, as well as joint debts. And through the spouse who has not filed, creditors may be able to seize joint assets.
Once you file for bankruptcy, creditors are required by law to stop "collections" actions, provided you included the debt in your bankruptcy filing. However, debt collectors may break the law and continue to pursue you. If this happens, contact your bankruptcy attorney; you may even be eligible to receive damages from the collectors.
Look for an attorney who specializes in bankruptcy, and who practices in your area. (It helps if the attorney knows local rules, judges, and trustees.) Be sure the attorney is a member of The National Association of Consumer Bankruptcy Attorneys.
Compare fees! Talk to several bankruptcy attorneys and obtain quotes.
It is possible to file for bankruptcy by yourself. However, because there are long term financial and legal implications, it's almost always best to hire an attorney.
If you choose to file on your own - or just want to learn more before filing - we highly recommend the following books: