If you’re currently in a lot of debt and you can’t see any way out, filing for bankruptcy may be the most powerful and effective tool at your disposal. Bankruptcy stops most creditors dead in their tracks. It can stop the collection calls and letters and it can stop most debt collection actions, including wage garnishments and lawsuits, with limited exceptions.
A Chapter 7 bankruptcy can wipe out or erase many types of debt, such as medical debt, credit card debt, personal loans, past-due utility bills, etc. But, it doesn’t discharge all types of debts; there are exceptions. A debtor cannot discharge the following types of debts in a Chapter 7or Chapter 13 bankruptcy:
- Recent tax debts (older tax debts may be discharged)
- Child support arrears
- Spousal support (alimony)
- Court-ordered fines (e.g. fines for criminal convictions or traffic violations)
- Victim restitution (for crime victims)
- Student loan debt (unless you can prove that paying would cause undue hardship)
What a Bankruptcy Can Do
The two primary bankruptcies filed by consumers are Chapter 7 and Chapter 13. Chapter 7 is reserved for low-income filers. If a debtor’s income is too high, he or she will have to file a Chapter 13 instead. With a Chapter 7, most unsecured debts are wiped out, whereas, with a Chapter 13, the debtor goes on a 3 to 5-year repayment plan where they pay off all or a portion of their debts over the life of the repayment plan.
- Once bankruptcy is filed, the “automatic stay” halts most, if not all, debt collection activities.
- Chapter 7 wipes out many types of debts.
- Chapter 13 can protect a home from foreclosure.
- The automatic stay can stop a foreclosure or repossession in a Chapter 7 case, but if the debtor doesn’t bring the account current, he or she can lose the house or car after the automatic stay is lifted. But with a Chapter 13, the debtor makes arrangements to catch up on payments so they can keep the house or car.
- If you have a debt that is secured by collateral, such as a car, computer, or a house, you can wipe out the debt with a Chapter 7, but you can’t keep the property.