As soon as a bankruptcy case is filed with the court, bankruptcy law dictates that debt collection has to stop right away. This is called the automatic stay. It halts all collection efforts including collection calls, lawsuits, and wage garnishments.

Individuals filing for bankruptcy will use either Chapter 7 or Chapter 13. The main differences of Chapter 7 vs. Chapter 13 bankruptcy are the eligibility requirements, how debts are resolved and the time frame.

Chapter 7 bankruptcy eliminates or “discharges” debts. It allows you to discharge most unsecured debt. It is a liquidation plan in which non-exempt assets are used to satisfy debts owed to creditors. Most Chapter 7 cases are “no asset” cases – meaning your property is protected or exempt from creditors’ claims. The Chapter 7 process takes approximately three to four months.

Chapter 7 debtors must pass a means test based on the filer’s household income. If your income is less than the median household income for a family of the same size in the same state, you qualify for Chapter 7 relief. If this average income exceeds the median income, you may not be eligible to file for Chapter 7 relief and may have to consider filing a Chapter 13 case.

Chapter 13 is also known as “wage earners” bankruptcy. You must have regular income to repay some portion of your debt through a court approved plan within three to five years. You keep all of your property, including non-exempt assets. The big advantage of Chapter 13 is that it allows you to keep your home or car by catching up on past-due payments.

If your current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If your current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years.

Bankruptcy may be the best option if:

• You are dealing with illness, job loss, divorce, etc.
• You are facing lawsuits, judgments or garnishments
• You are facing foreclosure or repossession of property
• You see no way of paying off debt within five years
• You use credit cards to pay for basic necessities
• You are unable to save for a rainy day or retirement

Bankruptcy may allow you to:

• Stop debt collection calls and similar creditor actions to collect a debt;
• Eliminate the legal obligation to pay most or all of your debts.
• Stop wage garnishments and in some circumstances, require the return of garnished wages taken in the 90 days before you filed bankruptcy;
• Stop foreclosure on your house and give you a chance to catch up on missed payments;
• Prevent repossession of a car, mobile home or other property, or force the creditor to return property even after it has been repossessed;
• Restore or prevent termination of utility service. The utility company may require you to pay a security deposit to continue service;
• Challenge the claims of creditors who have committed fraud or who are trying to collect more than you really owe;
• Remove or reduce the amount of certain liens on your property, other than the first mortgage on your home;
• Prevent eviction for failure to pay rent under certain circumstances;
• Get your driver’s license back if you lost your license solely because you could not pay court ordered damages caused in an accident.

The law allows you to keep certain property that is “exempt” or protected from creditors. These assets include some or all of the equity in your home, a car, most basic household furnishings, clothing, pension plans and retirement accounts.

Bankruptcy exemptions are not automatic. To protect property, you must claim appropriate exemption on Schedule C when filing bankruptcy petition. Schedule C lists all of the property you claim as exempt along with the state law or Bankruptcy Code provision that protects it.

You must complete a credit counseling course from an approved agency within 180 days prior to filing for bankruptcy. In addition, after filing for bankruptcy, you must complete a personal financial management course with an approved agency and submit another “Certificate of Debtor Education” to the court within 60 days of the “Meeting of Creditors” or you will not receive a discharge.

You are required to attend the Meeting of Creditors also known as the 341 Meeting, which is normally held about one month after a petition is filed. Prior to the meeting you must submit to the trustee, copies of your last 60 days of pay stubs and a copy of your last filed Federal and State tax returns.

At the 341 Meeting, the trustee will question you, under oath, about the information listed in your Petition. Also, any of your creditors may attend and be heard. Based on the examination, the trustee may ask you to supply further information in order to give the trustee a more accurate picture of your financial affairs.

You are required to disclose all of your debts. Debts fall into two categories:

Secured Debts – debts in which the creditor has a security interest in the property that was provided as collateral for the debt, such as a home mortgage or car note.

Unsecured Debts – are not backed by property or other collateral. Includes credit cards, medical bills, and personal unsecured loans.

Bankruptcy will eliminate:

• Credit card debt
• Medical debt
• Personal loans
• Overpayment of government benefits
• Unpaid rent
• Past due utility bills
• Secured debts if you are willing to surrender property

The following debts cannot be discharged except in rare cases:

• Child support and alimony
• Tax debts accrued in the last 3 years
• Debts obtained by fraud or false pretenses 
• Fines and penalties to a government agency including parking tickets and moving violations
• Debts for personal injury caused by drunk driving
• Student loans, unless you can demonstrate undue hardship

• Complete relief of all dischargeable debts with no further obligation to repay
• Bankruptcy will stay on your credit report for up to 10 years
• You will be ineligible for home mortgage for 3 years
• Credit score will start to improve within months of filing
• You cannot get another discharge in bankruptcy for 8 years

You may have a problem that can be solved without having to file bankruptcy. For example:

• Debt Collector Harassment – If you ask a creditor to leave you alone, they have to stop calling or writing you. You will still owe the debt, but they cannot harass you about it. If they still do not stop, they are breaking the law. You may be able to sue them. They also cannot call you at all hours, call other people about your debt, threaten you with jail or bodily harm, or use abusive language.
• Collections and Court Judgments – Sometimes a collector cannot take any money or property from you, even if they take you to court. Some income and property is “exempt.” This means a creditor can’t take it to pay a judgment. If you do not make much money, or own valuable property, all your money and property might be exempt.
• Overwhelming Debt – Financial counseling or debt consolidation services can help you better understand and manage your debts. Debt consolidation involves combining multiple debts such as credit cards, bills, or other payments into a single debt, which means making a single monthly payment instead of several ones. Debt consolidation makes it easier to handle debts and manage your budget as it reduces the number of monthly bills you need to pay.

You should only file for bankruptcy after determining that bankruptcy is the best way to deal with your financial problems. This brochure does not explain every aspect of the bankruptcy process. If possible, you should speak with an attorney familiar with bankruptcy prior to filing a bankruptcy case.

The Legal Aid Society provides assistance and representation with bankruptcy relief. If you are interested in bankruptcy assistance, please call us at 888-663-6880.

The information in this document has been prepared by The Legal Aid Society for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. You should not act upon any information without retaining professional legal counsel.