Bankruptcy allows people struggling with debt to wipe out certain obligations and start with a clean slate. The two primary bankruptcy types filed—Chapter 7 and Chapter 13 bankruptcy—each offer different benefits, and, in some cases, treat debt and property differently, too. The type of chapter that’s right for you depends on your income, property, and goals.
Here are some of the things you can expect bankruptcy to do.
Stop Creditor Harassment and Collection Activities
Once you file, the court puts in place an order called the automatic stay. The stay stops most creditor calls, wage garnishments, and lawsuits, but not all. For instance, creditors can still collect support payments and criminal cases will continue to proceed forward.
Stop a Foreclosure, Repossession, or Eviction (at Least Temporarily)
The automatic stay will stop all of these actions as long as they’re still pending.
- Evictions
An eviction that’s still in the litigation process will come to a halt after a bankruptcy filing. But the stay will likely be temporary. Keep in mind that if your landlord already has an eviction judgment against you, a bankruptcy won’t help in the majority of states.
- Foreclosure and repossession
Although the automatic stay will stop a foreclosure or repossession, filing for Chapter 7 won’t help you keep the property. If you can’t bring the account current, you’ll lose the house or car once the stay lifts. By contrast, Chapter 13 has a mechanism that will allow you to catch up on past payments so you can keep the asset.
Wipe Out Credit Card Debt and Most Other Nonpriority Unsecured Debts
Bankruptcy is very good at wiping out unsecured credit card debt medical bills, overdue utility payments, personal loans, gym contracts. In fact, filing for bankruptcy can wipe out most nonpriority unsecured debts other than school loans.
How quickly your debt will get wiped out will depend on the chapter you file:
- Chapter 7 bankruptcy
This chapter takes an average of three to four months to complete.
- Chapter 13 bankruptcy
If you file for Chapter 13 rather than Chapter 7, you’ll likely have to pay back some portion of your unsecured debts through a three- to five-year repayment plan. However, any unsecured debt balance that remains after completing your repayment plan will be discharged.
Debt Settlement
Debt Settlement is the only type of debt-relief program, outside of bankruptcy, that can reduce or eliminate a substantial amount of your debt without making payment in full. The concept is simple. Your attorney reviews your finances and your debts and identifies which lenders are likely to accept an offer-in-compromise — payment of less than the full balance — in exchange for canceling the debt. A full financial analysis is performed, and a budget is prepared for each client to confirm affordability.
The monthly or bi-weekly payment amount is then approved for the term of 24 to 48 months. As funds accumulate in an FDIC-insured escrow account, established in the client’s name and management by a bank or third party service provider, they will be used to pay agreed upon settlements with the creditors. In many cases, the monthly contributions are less than the minimum payments the client would normally be making to the creditors.