What Does Bankruptcy Do?

Filing for bankruptcy relief can help you get out of debt. Depending on the chapter you file, you’ll be able to:

• stop foreclosure, repossession, lawsuits, and other collection activities
• eliminate your personal liability for most types of debt, and
• reorganize your debts and catch up on missed payments.

Learn what Chapter 7 and Chapter 13 can offer.

Stop Collection Activities With the Automatic Stay

The automatic stay is a powerful order that goes into effect as soon as you file for bankruptcy. The stay prevents most creditors from initiating or continuing collection activities against you. With a few exceptions, as long as the automatic stay is in place, creditors cannot sue you, foreclose on or repossess your property, garnish your wages, send you collection letters, or even call you to collect their debts.

Certain activities, such as the collection of support obligations or criminal actions, can continue to move forward. Learn more about the automatic stay in bankruptcy.

Eliminate Most Types of Debt

The reason most people file for bankruptcy is to wipe out (discharge) debt. When you receive a bankruptcy discharge, it extinguishes your liability to pay back many types of obligations, such as credit card debt, medical bills, and personal loans.

But not all debts can be discharged in bankruptcy.

Common examples of nondischargeable debts include:

• recent tax obligations
• alimony and child support
• student loans (unless you can prove that paying them back is an undue hardship on you but this is extremely difficult to do), and
• debts obtained by fraud.

Learn about debt discharge in Chapter 7 and discharging debt in Chapter 13.

Avoid Foreclosure or Repossession

If you are facing foreclosure or repossession, bankruptcy’s automatic stay can stop the process and provide you time to negotiate with the lender or bring your account current. If you cannot cure your default in a short period, you can catch up on payments and keep your home by filing for Chapter 13 bankruptcy.

Reorganize Your Debts and Catch Up on Missed Payments

Chapter 13 bankruptcy, or reorganization bankruptcy, allows a debtor to catch up on missed mortgage or car loan payments and pay off nondischargeable debts, such as alimony, child support, and priority tax arrears, through a repayment plan. Depending on your income and amount of debt, Chapter 13 plans typically last three to five years.

As long as you continue to make your plan payments, the automatic stay stops your lender from foreclosing on or repossessing your property. But unless you are paying off the entire obligation (usually a car loan) through your plan, you must continue to make your ongoing loan or mortgage payments while catching up on your arrears in your bankruptcy. If you don’t make your regular payments as they come due, the lender can file a motion for relief from the stay and get court permission to resume foreclosure or repossession.