Bankruptcy is a powerful tool for debtors. However, it does not solve all problems. Learn what comes about when you file for bankruptcy and what it can do to help you improve your financial situation.
When facing financial difficulties, knowing what happens in bankruptcy is essential before filing a bankruptcy case. If you are experiencing severe debt problems, there is no doubt that filing for bankruptcy can be a solid remedy. It stops wage garnishments, most lawsuits, and other collections. It also removes many types of debt, including medical bills, credit card balances, personal loans, etc.
But it does not stop all creditors, and it does not wipe out all obligations. For instance, you will still have to pay your student loans unless you can prove hardship. You will also need to pay arrearages for child support, alimony, and most tax debts.
To find out what happens in bankruptcy and how bankruptcy works, read on!
What Occurs When One File for Bankruptcy: What Bankruptcy Can Do
Bankruptcy allows people wrestling with debt to eliminate specific obligations and get a fresh start. Chapter 7 and Chapter 13, the two (2) primary bankruptcy types filed, each offers unique advantages and treat debt and property differently. The right chapter for you will depend on your income, property, and goals. Below are some of the things you can expect.
Bankruptcy Can Stop Creditor Collection Activities and Harassment. Once you file, the court will issue an automatic stay order. This order stops most creditor calls, lawsuits, and wage garnishments, but not all. For instance, criminal cases will continue, and creditors can still collect support payments.
Bankruptcy Can Stop (at Least Temporarily) an Eviction, Foreclosure, or Repossession. The automatic stay will eliminate these actions as long as they are pending. Once complete, bankruptcy would not help.
Bankruptcy Can Wipe Out Most Other Non-priority Unsecured Debts and Credit Card Debt. Bankruptcy is good at erasing most nonpriority unsecured debts other than school loans. For example, you can discharge unsecured credit card debt, medical bills, overdue utility payments, personal loans, gym contracts, and more. The debt is unsecured if you did not promise to give back the purchased property if you did not pay the bill. By contrast, you will have to return the purchased item if you have a secured credit card. Electronics, jewelry, computers, furniture, and large appliances are often attached to debts.
Bankruptcy Can Wipe Out Secured Debt. If you cannot afford a payment you secured with collateral—such as a mortgage or car loan—you can wipe out the debt in bankruptcy. But you would be unable to keep the house, car, computer, or other items securing loan payment. When you voluntarily agree to ensure debt with property, you must pay what you owe or give the property back.
What Occurs When You File for Bankruptcy: What Bankruptcy Cannot Do
Bankruptcy does not cure all debt problems. Here’s what it cannot do for you.
Bankruptcy does not avert a secured creditor from repossessing or foreclosing property you can not afford. A bankruptcy discharge terminates debts, but it does not eliminate liens. A lien allows the lender to take and sell the property and apply its profits to a loan balance. Meaning the lien stays on the property until the debt gets paid, and all things considered, if the mortgage remains unpaid, the lender can exercise its lien rights to foreclose on the house once the automatic stay is lifted.
Bankruptcy does not stop child alimony and support obligations. Child alimony and support obligations survive bankruptcy. Hence, you will remain to owe these debts (in total) as if you had never filed for bankruptcy. And should you use Chapter 13, you will have to pay these debts in full through your plan.
Bankruptcy does not stop student loans (except in limited circumstances). Student loans can be ejected in bankruptcy (only if) you manifest that repaying the loan would cause you “undue difficulty” (which is a very tough standard to meet).
Bankruptcy does not eliminate most tax debts. Eliminating tax debt in bankruptcy is difficult, but it is sometimes possible for older unpaid tax debts.
Bankruptcy does not eliminate other nondischargeable debts. These debts are not dischargeable under either chapter, like debts you forget to list in your bankruptcy papers, debts for death or personal injury due to fines and penalties imposed as a punishment (traffic tickets and criminal restitution), and intoxicated driving.
Debt related to fraud might get eliminated. Bankruptcy will not discharge a fraud-related debt if a creditor files an adversary proceeding lawsuit and persuades the judge that the obligation should survive your bankruptcy.
More Bankruptcy Help?
Did you know that the Law Offices of Ronald E. Stadtmueller have been making the law accessible for over thirty years? It is true—and we want to ensure you find what you need. And do not forget that our San Diego’s Law Firm Bankruptcy homepage is the best place to start if you have other questions! Give us a call or contact us online for an hour of free consultations.