Bankruptcy is designed to be a fresh start that allows you to develop a court-approved plan to pay off or erase debts. If you are having difficulty paying your debts, declaring bankruptcy is one (but not the only) approach to finding alternative ways to handle them.
How Does Personal Bankruptcy Work?
There are two types of personal bankruptcy, each one named after the section of the law that governs it. In each case, you receive protection that generally prevents debtors from demanding payment of your outstanding debt while you’re in bankruptcy. This protection can allow you a measure of stability while you work out how your debts will be paid. While it can be used to address a variety of outstanding debts, bankruptcy does not end your obligation to pay outstanding taxes, child support or alimony and, in most cases, student loans.
- Chapter 7 bankruptcy can allow you to pay off what you can with your available cash (or liquid assets) and be released from paying all or some of the rest. To qualify for Chapter 7 bankruptcy, you must pass a means test that evaluates whether your income is below certain limits. If you don’t pass, you can file for Chapter 13 bankruptcy.
- Chapter 13 bankruptcy lets you use your monthly income to pay off some or all of your debts under a repayment plan that spreads payments over three to five years.
How Do I Get Started?
Before filing under Chapter 7 or 13, you must receive credit counseling from an approved agency. Part of the point is to determine whether you have other options besides bankruptcy. Bankruptcy can also involve taking required debtor education, or a personal finance management course. Once they decide to declare bankruptcy, an individual or a married couple file a petition and other paperwork with the bankruptcy court. The court appoints a trustee to review your documents and direct the process. Both types of bankruptcy also involve a meeting of creditors, in which you answer questions about your finances and related topics. The next steps can vary based on the types of bankruptcy involved.
What Happens After a Bankruptcy?
Once your bankruptcy is completed, generally you are either released from paying debts (in a Chapter 7 case) or you have finished with your repayment plan (under Chapter 13). It’s a good idea to get a confirmation letter that your debt has been discharged and to check your credit reports after about three months to see if they record the end of the bankruptcy. While both types bankruptcy may remain on your credit reports for several years, you should be able to raise your credit rating gradually if you avoid accumulating new debt and pay your bills on time. If you have trouble qualifying for credit, try getting a secured credit card, in which you deposit money in a bank account as collateral for your purchases. Using and promptly paying off this card over time can help repair your credit rating. “Credit repair” companies that offer to help you get a new start on your credit history and rating are actually scams, so don’t fall for them.