[heading]How Bankruptcy Works[/heading]
Consumers considering personal bankruptcy have two choices:
Chapter 7 Bankruptcy
Chapter 7 allows you to effectively eliminate (discharge) most if not all of your unsecured debts without having to pay them. This includes credit card debt, medical debt, and personal loans. Unfortunately, not all consumers qualify for a Chapter 7, and have to qualify by demonstrating that their income has been less than the average income in their geographic area. There are other criteria as well. Also, not all debts are subject to discharge, such as tax debts, student loans, and child support payments.
Chapter 13 Bankruptcy
Chapter 13 is usually an option for those who do not qualify for a Chapter 7, or own real estate that is in danger of foreclosure, or owe large tax debts and cannot otherwise qualify for an IRS payment plan. It is also useful for placing a hold on pending lawsuits. Chapter 13 requires the debtor to make monthly payments to a court appointed trustee for a period of 3 to 5 years in accordance with a court-approved plan. The trustee then distributes the amount to creditors. With Chapter 13, creditors are eventually paid what they are owed.
What Bankruptcy Does
In most cases, filing bankruptcy immediately stops creditors from seeking to collect debts from you, at least until they’re sorted out by the bankruptcy court. Bankruptcy may make it possible to:
- Stop foreclosure or repossession of property so you can catch up on missed payments.
- Stop wage garnishments, debt collection harassment, and similar creditor actions to collect a debt; and
- Allow you to challenge creditors who have committed fraud or are trying to collect more money than you really owe.
What Bankruptcy Doesn’t Do
Of course, bankruptcy can’t cure every financial problem, and not every kind of debt can be eliminated. For instance, in bankruptcy, it is usually not possible to:
- Eliminate certain types of debt, such as child support, alimony, certain other debts related to divorce, most student loans, criminal fines, and some taxes.
- Eliminate debts that are secured by collateral, like car loans and home mortgages.
- Filing for bankruptcy will not protect co-signers on your debts. If a relative or friend has co-signed a loan, and you discharge the loan in bankruptcy, the co-signer may still have to repay all or part of the loan.