Bankruptcy is a legal process in the United States that allows people and companies to totally erase or reduce their debt, depending on the type of bankruptcy. There are two main types of bankruptcy for consumers: Chapter 7 bankruptcy and Chapter 13 bankruptcy. The main type of bankruptcy for businesses is Chapter 11 bankruptcy.
The bankruptcy code is federal law. Each year, personal bankruptcy laws help hundreds of thousands of Americans get a fresh start.
People usually file bankruptcy when they have more debt than they’ll ever be able to pay back. Most people file bankruptcy after losing a job, a medical illness, a divorce, or a small business failure.
Many people decide to file after experiencing wage garnishment, a debt collection lawsuit, a repossession, or a foreclosure.
In the coming months, many people will use the safety net of bankruptcy to recover from the loss of their regular income due to COVID-19, especially if they’re dealing with high credit card interests rates.
Chapter 7 bankruptcy can help totally erase the following common debts:
Credit card debt
Personal loans and payday loans
Judgments from debt collection agencies
The moment someone files bankruptcy, a rule called the automatic stay goes into effect, which temporarily prevents creditors from collecting any debts that a filer owes them.
Child support and alimony
Most government debts like recent taxes and fines
It’s rare for student loans to be erased
Chapter 7 is the type of bankruptcy typically used by lower-income families with minimal assets to totally erase certain debts, including credit card and medical debt. Chapter 13, more common among homeowners, involves partially repaying creditors over three to five years, while being able to keep more expensive property.
Will bankruptcy hurt my credit score?
In our experience, bankruptcy often helps people with low credit scores (below 600) improve their credit scores in the near term. People with higher credit scores often see their credit decrease in the near term. Everyone has a chance to rebuild their credit over time by using tools like secured credit cards.
Chapter 7 bankruptcy remains on your credit report for 10 years and Chapter 13 bankruptcy remains on your credit report for 7 years.
No, you will not lose all of your stuff when you file for bankruptcy. In 95 percent of Chapter 7 bankruptcies, filers are able to keep all of their property.
The bankruptcy laws have rules in place called “exemptions” that allow you to keep several different types of property, such as your cash, clothes, furniture, cars, etc. up to a certain dollar amount, known as “exemption limits.”
The specific exemptions you can use to protect your property may depend on your state. If your property value exceeds the exemption limit that applies, the trustee may seize the property, sell it, and split the proceeds from the sale with your creditors. Property that isn’t protected by exemptions is considered “non-exempt property.”