Bankruptcy is a court process that may help people who have too much debt as well as the people or businesses who are owed those debts. The person filing for bankruptcy is called the “debtor.” The people or businesses the debtor owes money to are called “creditors.”

Filing for bankruptcy protects the debtor from collection activity. This is called an “automatic stay.” Depending on which type of bankruptcy case, it can also help them get rid of some of their debts.

There are many rules, and it can be extremely difficult to file for bankruptcy on your own. Talk to a lawyer before you file and use our tool to help you decide if bankruptcy is right for you.

Types of bankruptcy

There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13. The names come from chapters of the bankruptcy law that set the rules for each type of case.

Chapter 7

In a chapter 7 bankruptcy, many of your debts may be “discharged,” or canceled. This means you no longer owe them.

Most of your property is sold to pay off your debts. You may be allowed to keep some property. This is called “exempt" property.

To qualify for a chapter 7, you must have very low income and assets. Learn more about qualifying for bankruptcy.

Chapter 13

In a chapter 13 bankruptcy, you agree to a repayment plan to try and pay off your debts. You also get to keep most of your property.

To qualify for a chapter 13, you must have enough regular or consistent income to make payments on your debt under a repayment plan. Learn more about qualifying for bankruptcy.

A judge will review your repayment plan and decide whether to approve it. If the plan is approved, you will make regular, fixed payments to a chapter 13 trustee or court-appointed official who helps run chapter 13 cases. The trustee then pays your creditors.

In a chapter 13 bankruptcy, you must pay your creditors in full if you can. If that is not possible, you must pay all of your disposable income for 3-5 years. Disposable income is the income left over after paying necessary living expenses.

Once the repayment plan is completed, you will get a discharge of some of your remaining debts. You must still pay certain back taxes and any obligations in child support and maintenance in full during the plan. Also, some types of debts cannot be discharged.

It is important to speak with a lawyer if possible before filing for chapter 13 bankruptcy because creating a repayment plan is a very tough thing to do without an attorney. Most cases filed without counsel do not succeed.

Reasons to file for bankruptcy

Here are some good things that might happen if you file for bankruptcy:

• In chapter 7, most debts are discharged (wiped out), giving you a fresh start,
• In chapter 13, you can save some of your property like a house or car,
• Bankruptcy at least temporarily stops wage garnishment and harassment by collection agencies,
• Foreclosures and repossessions are stopped and cannot move forward unless the court allows,
• You can keep exempt property,
• You can stop utility shut-offs, or restore service after paying a reasonable deposit, then pay only for current service,
• Employers and public agencies cannot retaliate against you for filing bankruptcy, and
• If your driver's license was suspended for not paying a debt that is dischargeable in bankruptcy, you can get your license reinstated.

Reasons not to file for bankruptcy

Here are some reasons bankruptcy might not be a good idea for you:

• Bankruptcy stays on your credit report for 7 to 10 years or can negatively impact your credit rating,
• Getting credit may be harder or more expensive during or after a bankruptcy,
• It may cause strain in relationships with some creditors and cosigners,
• You may have to return property that is not paid for (chapter 13 can be used to save some additional property),
• You can only get a chapter 7 discharge once every eight years, and
• You may be able to protect your income and property without filing bankruptcy.

Also, the following types of debt will remain even after a bankruptcy:

• Unpaid child support payments,
• Unpaid maintenance or alimony payments,
• Unpaid fines,
• Student loans (usually),
• Most unpaid state and federal taxes,
• Criminal restitution orders,
• Debts due to fraud, theft or embezzlement,
• Damages to another person caused by drunk driving or something done on purpose, and
• Debts from a property settlement in a divorce.

Finally, here is a list of things bankruptcy cannot do for you:

• Get rid of a security interest, such as a mortgage or security interest in a car,
• Stop an eviction, if the eviction court already entered an eviction order before the bankruptcy was filed,
• Protect cosigners, unless they also file for bankruptcy,
• Release you from credit card debts that happened right or shortly before or the bankruptcy case was filed,
• Discharge debts that are incurred after the bankruptcy is filed,
• Discharge debts the court decides you can afford to pay if you have enough income, and
• Allow you to keep valuable certain property, such as, for example, a vacation home, an RV, or expensive jewelry.

Bankruptcy usually won’t help if you’re collection proof

Filing for bankruptcy will usually not help you if you are collection proof. You are a collection proof debtor if all of the following are true:

• You have no income, your take-home pay from work is below 45 times the state minimum wage per week, or your income is only from a protected source like public benefits, child support or Social Security.
• You do not own a home, or own one with less than $15,000 in equity. Equity is the difference between how much is owed on the mortgage and how much the house is worth right now.
• You do not own a car, or own one with less than $2,400 in equity.
• You do not have personal property, including money in bank accounts, worth more than $4,000.

If you are a collection proof debtor, you do not need bankruptcy to stop debt collectors from contacting you. You can use our Letter from Collection Proof Debtor to ask the debt collectors to stop contacting you.

Bankruptcy while married

If you are married, you don't have to file a joint bankruptcy with your spouse. You can choose to file for bankruptcy alone. However, you still have to include your spouse's income on some bankruptcy forms.