Bankruptcy is a powerful tool for debtors (a debtor is someone who owes money to someone else), but some kinds of debts can’t be wiped out in bankruptcy. If you’re facing serious debt problems, Filing for Bankruptcy can be a powerful remedy. It stops most collection actions, including telephone calls, wage garnishments, and lawsuits (with some exceptions). It also eliminates many types of debt, including credit card balances, medical bills, personal loans, and more. But it doesn’t stop all creditors, and it doesn’t wipe out all obligations. For instance, you’ll still have to pay your student loans (unless you can prove a hardship) and arrearages for child support, alimony, and most tax debts. Read on to learn more about the things that bankruptcy can and cannot do.
What Bankruptcy Can Do
Bankruptcy allows people struggling with debt to wipe out certain obligations and get a fresh start. The two primary bankruptcy types filed—Chapter 7 and Chapter 13 bankruptcy—each offer different benefits, and, in some cases, treat debt and property differently, too. You’ll choose the chapter that’s right for you depending on your income, property, and goals.
Stop Creditor Harassment and Collection Activities
Once you file, the court puts in place an order called the automatic stay. The stay stops most creditor calls, wage garnishments, and lawsuits, but not all. For instance, creditors can still collect support payments and criminal cases will continue to proceed forward.
Stop a Foreclosure, Repossession, or Eviction
The automatic stay will stop all of these actions as long as they’re still pending.
• Evictions. An eviction that’s still in the litigation process will come to a halt after a bankruptcy filing. But the stay will likely be temporary. Keep in mind that if your landlord already has an eviction judgment against you, a bankruptcy won’t help in the majority of states.
• Foreclosure and repossession. Although the automatic stay will stop a foreclosure or repossession, filing for Chapter 7 won’t help you keep the property. If you can’t bring the account current, you’ll lose the house or car once the stay lifts. By contrast, Chapter 13 has a mechanism that will allow you to catch up on past payments so you can keep the asset.
Wipe Out Credit Card Debt and Most Other Non-priority Unsecured Debts
Bankruptcy is very good at wiping out unsecured credit card debt (the debt is unsecured if you didn’t promise to give back the purchased property if you didn’t pay the bill), medical bills, overdue utility payments, personal loans, gym contracts. (If you have a secured credit card, such as from a jewelry, furniture, or electronics store, you’ll have to give the purchased item back.) In fact, filing for bankruptcy can wipe out most non-priority unsecured debts other than school loans.
How quickly your debt will get wiped out will depend on the chapter you file:
• Chapter 7 bankruptcy. This chapter takes an average of three to four months to complete. (Learn more in Your Debt in Chapter 7 Bankruptcy.)
• Chapter 13 bankruptcy. If you file for Chapter 13 rather than Chapter 7, you’ll likely have to pay back some portion of your unsecured debts through a three- to five-year repayment plan. However, any unsecured debt balance that remains after completing your repayment plan will be discharged.
Wipe Out Secured Debt (But You’ll Have to Give Up the Purchased Property)
If you can’t afford a payment that you secured with collateral—such as a mortgage or car payment—you can wipe out the debt in bankruptcy. But you won’t be able to keep the house, car, computer, or other item securing payment of the loan.
What Only Chapter 13 Bankruptcy Can Do
Chapter 7 and 13 each offer unique solutions to debt problems. Chapter 7 is primarily for low-income filers, and therefore, it won’t help you keep property if you’re behind on payments. But, if you have income to pay at least something to creditors, then you’ll be able to take advantage of the additional benefits offered by Chapter 13.
Here are some of the things that Chapter 13 can do.
Stop a mortgage foreclosure. Filing for Chapter 13 bankruptcy will stop a foreclosure and force the lender to accept a plan that will allow you to make up the missed payments over time (you’ll also have to stay current on your regular monthly payments). To make this plan work, you must be able to demonstrate that you have enough income to support such a repayment plan. Allow you to keep property that isn’t protected with a bankruptcy exemption. No one gives up everything that they own in bankruptcy. You’re allowed to protect (exempt) items you’ll need to work and live using bankruptcy exemptions. A Chapter 7 debtor gives up nonexempt property, but not a Chapter 13 filer. This doesn’t mean that you get to keep more assets, however. You’ll need to pay the value of any nonexempt property to your creditors in your repayment plan. “Cram down” secured debts when the debt balance is more than the value of the property that secures them. Chapter 13 has a procedure that allows you to reduce a debt to the replacement value of the property securing it (but you’ll have to pay off the debt in full through your plan). For example, if you owe $10,000 on a car loan and the car is worth only $6,000, you can propose a plan that pays the creditor $6,000 and discharge the rest of the loan. However, exceptions exist. For instance, you can’t cram down a car debt if you purchased the car during the 30-month period before you filed for bankruptcy. Also you won’t be able to use the cramdown provision on the mortgage of your residential home.
What Bankruptcy Can’t Do
Bankruptcy doesn’t cure all debt problems. Here’s what it can’t do for you.
• Prevent a secured creditor from foreclosing or repossessing property you can’t afford. A bankruptcy discharge eliminates debts, but it doesn’t eliminate liens. A lien allows the lender to take property, sell it at auction, and apply the proceeds to a loan balance. The lien stays on the property until the debt gets paid. If you have a secured debt (a debt where the creditor has a lien on your property), bankruptcy can eliminate your obligation to pay the debt, but it won’t take the lien off the property the creditor will still be able to recover the collateral. For example, if you file for Chapter 7 bankruptcy, you can wipe out a home mortgage; however, the lender’s lien will remain on the home. As long as the mortgage remains unpaid, the lender can foreclose on the home (once the automatic stay lifts, of course).
• Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy, so you’ll continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, you’ll have to pay these debts in full through your plan.
• Eliminate student loans, except in very limited circumstances. Student loans can be discharged in bankruptcy only if you can show that repaying the loan would cause you “undue hardship,” which is a very tough standard to meet. You must prove that you can’t afford to pay your loans currently and that there’s very little likelihood you can do so in the future.
• Eliminate most tax debts. Eliminating tax debt in bankruptcy isn’t easy, but it’s sometimes possible for older unpaid tax debts
• Eliminate other non-dischargeable debts. The following debts aren’t dischargeable under either chapter:
• debts you forget to list in your bankruptcy papers (unless the creditor learns of your bankruptcy case)
• debts for personal injury or death due to intoxicated driving, and
• fines and penalties imposed as a punishment, such as traffic tickets and criminal restitution.
Filing for Bankruptcy
To file for bankruptcy you must complete the right forms and file them in Bankruptcy Court. The forms you need include a “petition” and “schedules” that give information about your finances.
To file for bankruptcy you must:
• Live in the Utah; and
• Take a course with an approved non-profit budget and credit counseling agency, no more than 180-days before filing (unless an exemption applies).
You cannot file for bankruptcy if:
• You are in the middle of a bankruptcy case now; or
• Your bankruptcy case ended in the last 180-days because:
• you did not follow a judge’s order on purpose, or
• did not appear before the court when you were suppose to go and did not do the required steps in the case (failure to prosecute the case), or
• you asked that the old case be dismissed after a motion for relief from the automatic stay was filed.
What happens after I file the case?
Meeting of the creditors
After you file the case the Bankruptcy Court sends you a notice with a date and time for a “meeting of the creditors.” Go to the meeting. All of your creditors are invited to the meeting. You meet with a “trustee”. The trustee makes sure the information on all of forms and papers in the case are correct. The trustee asks you questions about the case. He or she may ask you about:
• your income and expenses,
• your taxes,
• your assets, and
• why you filed for bankruptcy.
The creditors can come to the meeting. They can look at the papers you filed and ask you questions. Most creditors do not come to the meeting. Sometimes the trustee will ask for more documents like pay stubs, bank statements, and pension documents. You must give the trustee the documents he or she asks for. Many of your assets are protected so the trustee cannot take them. These are called exempt assets. If you have non-exempt assets, the trustee may ask you to give him or her assets. The trustee will sell the assets and give the money to your creditors. You may be able to keep some of these assets if you can give the trustee the same amount of money he would get from selling them.
Personal Financial Management
After the meeting of the creditors you must take a second debt education course. You also had to take a credit counseling course before you filed for Bankruptcy. You need to file proof that you took the course with the Bankruptcy Court.
Can I discharge my debts?
Even if you can file for bankruptcy, sometimes you are not “eligible for a discharge.” You will still owe the debt.
You are not eligible for a discharge if you:
• got a discharge in a Chapter 7 or Chapter 11 case in the last 8 years;
• got a discharge in a Chapter 12 or Chapter 13 case in the last 6 years, except for two exceptions under the law; or
• you did not complete the second credit counselling course while the judge is deciding your case.
Even if you cannot get a discharge, you may want to file for bankruptcy because you can stop creditors from repossessing your things or foreclosing:
• usually you get an “automatic stay” that stops creditors as soon as you file, but it does not always last.
• In a chapter 13 bankruptcy, you can pay back missed payments. If keep up your payments, you can stop a foreclosure or repossession all together.
Life after Discharge
Many people worry about bankruptcy and their credit. A bankruptcy becomes part of your credit history for 10 years. You may still get credit. But it is often on very bad terms with high interest rates and annual fees. It is illegal to discriminate against someone for filing for bankruptcy.
• The government usually may not decide not to hire you because of a prior bankruptcy.
• Housing authorities and student loan agencies cannot deny a person because of bankruptcy.
• Utility companies may not refuse you services because you declared bankruptcy.
• Private employers cannot refuse to hire you or lay you off or fire you because you declared bankruptcy.
However, companies can decide not to give you the choices they give other people who have not filed for bankruptcy. You can rebuild your credit as soon as your bankruptcy ends. Only apply for credit when you know you can afford it. Only use it for what you can pay off in full at the end of the month.
How to apply for bankruptcy
If you are applying to become bankrupt, you must complete an online application and create an online account. You’ll need to provide information about your:
• Debts
• Income
• outgoings.
Including any letters, you’ve received from bailiffs or enforcement agents. Your application will be reviewed by an official adjudicator who works for the Insolvency Service. They’ll decide if you should be made bankrupt. You usually get a decision within 28 days of submitting your application.
Who is bankruptcy for?
If you have no real way of paying off your debts and few assets, then bankruptcy could be a suitable option. If you are a homeowner it’s worth looking at other options because bankruptcy puts your home at risk of being sold if there is enough equity in it. If you’re a tenant, your landlord can apply to evict you legally if you have fallen into rent arrears. It’s really important you don’t make a decision to go bankrupt alone. Talk to a free debt adviser first.
Can I be made bankrupt?
The minimum level of debt for which someone who you owe money to can force you into bankruptcy is £5,000. The process of being made bankrupt is different. However, high street lenders rarely use this option and will prefer to work with you to find another way to pay off your debts. It’s always best to talk things through with an experienced debt adviser before you decide to apply for bankruptcy. This is because the debt solution that is best for you depends on your personal circumstances. There are alternatives to bankruptcy, such as Individual Voluntary Arrangements or Debt Relief Orders.
A debt adviser can help you make the right decisions – meaning you could be debt free sooner than you thought.
A debt adviser will:
• treat everything you say in confidence
• give advice about better ways of managing your money
• never judge you or make you feel bad about your situation
• suggest ways of dealing with debts that you might not know about
• always be happy to talk to you, however small or big your problem is
• check you have applied for all the benefits and entitlements available to you.
You might only need to have one conversation with an experienced debt adviser to make sure that your plan to manage or clear your debts is the right one for you. If you need more support or don’t know where to start, you’re not alone. The people that let their debts build up before they seek advice often find:
• their cards are maxed out,
• things have spiraled out of control
• no one else will lend to them, and
• it takes much longer to pay back what they owe.
What happens after I go bankrupt?
After you go bankrupt, an Official Receiver will be appointed within two weeks of receiving your bankruptcy order.
They will assess your:
• income
• assets, and
• outgoings.
In order to decide how they can be used to meet your debts. You might also be asked to attend an interview with the official receiver. Your creditors have to make a formal claim to the trustee for the money they are owed. You can’t make direct payments to them and they can’t ask you for payments. After a period of time (usually one year), most of your outstanding debts are written off and you can make a fresh start. Until you are discharged from bankruptcy you will remain under bankruptcy restrictions. For example, you won’t be able to apply for credit of £500 or more without telling the lender about the bankruptcy. You can check your discharge date online using the Individual Insolvency Register. Any credit you do get is likely to be expensive both now and in the future. Bankruptcy affects your credit rating and credit reference agencies will keep your details on file for a minimum of six years.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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