FAQs about bankruptcy and filing bankruptcy

If you are unable to pay the people or businesses you owe, bankruptcy may wipe out all or part of that debt. Filing also puts an automatic shield between you and collection activity, including foreclosure, lawsuits, wage garnishment, repossession, and persistent phone calls. Whether bankruptcy fits your situation depends on many factors unique to your finances, so it is wise to review your options with a professional rather than deciding alone. A free consultation can help you evaluate which bankruptcy choices, if any, would benefit you.

Yes. Bankruptcy law lets you protect, or exempt, property when you file. That can include your home, vehicles, household furnishings, jewelry, clothing, retirement accounts, bank accounts, and cash. Most filers are able to protect everything they own, though limits can apply based on the value of your property, whether you file jointly with a spouse, and whether you are repaying anything to creditors through your case. Protecting your assets is a key part of evaluating any bankruptcy case.

Several forms of bankruptcy exist, but the main consumer filings are Chapter 7 and Chapter 13. In a Chapter 7, creditors normally receive nothing. In a Chapter 13, you repay at least a portion of your debts over a three-to-five-year period, and whatever remains unpaid is usually discharged. Which type of bankruptcy help suits you depends on your individual circumstances.

A Chapter 7 is often the simplest way to eliminate debt. Typically nothing is repaid to creditors, debts are discharged within a few months, and you can begin rebuilding your credit. For some financial situations, however, you may prefer to repay your debts, even partially, and a Chapter 13 may be the better fit.

Chapter 13 is designed to repay at least part of what you owe. Filers usually choose it for one of two reasons: they have to, or they want to. Some people cannot file Chapter 7 because their income is too high or because they filed bankruptcy recently; other restrictions exist, but these are the most common. After a Chapter 13 filing, debtors make monthly payments to creditors for three to five years under a court-approved Chapter 13 Plan, and what is not repaid through the plan is discharged. The required repayment amount depends on your finances: higher income generally means more repayment, while higher expenses generally mean less. Drafting a Chapter 13 plan is complex, and an incorrect plan can be rejected by the court. Choosing the right chapter, like deciding whether to file at all, is a complex decision best made with professional advice. The simplest way to choose the right path is to call for a free consultation.

Yes. Many people file Chapter 13 specifically to protect their home. Unlike Chapter 7, a Chapter 13 plan lets you cure any mortgage delinquency, or arrearage, even if foreclosure has already begun. Because a plan can run up to five years, you can spread repayment of the past-due portion over that time without fear of losing your home. As long as you keep making your plan payments, the mortgage company cannot foreclose or sell your home.

Possibly. A Chapter 13 filing can strip off junior deeds of trust, such as second or third mortgages and home equity lines of credit, if your home is worth less at filing than what you owe on your first mortgage. Because stripping a mortgage is not available in Chapter 7, many people choose Chapter 13 for this reason alone, even when they qualify for Chapter 7.

Apart from giving you up to five years to catch up on any mortgage delinquency, bankruptcy will not otherwise change your first mortgage if you stay in the home. Whether you file Chapter 7 or Chapter 13, your first mortgage obligation remains: you still owe what you owe, and the filing will not change the principal balance or your monthly payment. Bankruptcy also will not stop you from negotiating a loan modification with your lender after filing, just as you could before. If you surrender the home, you will no longer have to pay the first mortgage, or any mortgage, after filing bankruptcy.

Your income and debts determine your eligibility options, and a prior bankruptcy filing can also limit them. Typically, if you earn less than the average, or mean, annual income for a household of your size, you qualify for Chapter 7. Even if you earn more, you may still qualify if your expenses exceed your income. Chapter 7 eligibility is assessed through the means test, an analysis of your individual income and expenses. If you cannot qualify for Chapter 7, you may still be eligible for Chapter 13, in which you repay what you can afford and discharge what you cannot. Bankruptcy law may limit you to Chapter 13, but it will not force you to pay more than you are able. Even if you qualify for Chapter 7, you may still choose Chapter 13 if you can afford it, particularly if you want to save your home from foreclosure or strip off a second mortgage.

Yes. Bankruptcy law requires credit counseling both before and after you file. It is not difficult, does not involve repaying creditors, and costs little. The course can be completed online or by phone. After finishing the hour-long course, a certificate of completion is sent to you and usually to your attorney, confirming the requirement is met. Though simple, credit counseling is essential to filing and completing your case. Greenpath Debt Solutions, one of the many providers I have recommended for years, is listed on this site's links page.

Yes, depending on how much time has passed. Generally, eight years after filing bankruptcy you may file any chapter again. If less than eight years have passed, you can still file, but your options may be limited. For example, if you filed a Chapter 7 on March 1, 2004, you could file another Chapter 7 on March 1, 2012.