Bills.com > Manage Debt > Bankruptcy Overview & Information

Bankruptcy Overview & Information

Past due bills? Find a debt relief solution.
HIGHLIGHTS
  • Understand the types of personal bankruptcy available.
  • Consult with an experienced attorney when considering bankruptcy.
  • Choose bankruptcy as an option of last resort.

Advice to Help You Avoid Bankruptcy

Bankruptcy is a complicated and public legal process. Types of personal bankruptcy include Chapter 7 and Chapter 13. Both are options for consumers seeking to get debt relief. Unfortunately, after the passage of the Bankruptcy Reform Act in 2005, it became harder to qualify for a liquidation bankruptcy, and there is now more complexity to an already intimidating process.

Chapter 7: Liquidation

When you hear the word “bankruptcy,” you are most likely to think of a Chapter 7 bankruptcy. This type of bankruptcy is also entitled Liquidation, as it contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Basically, this means a court appointed trustee sells everything they can use to pay off your creditors, except what is exempt.

Sometimes, there is little or no nonexempt property in a Chapter 7 bankruptcy case, so there may not be an actual liquidation of the debtor’s assets. These cases are called no-asset bankruptcy cases.

A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most Chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge several months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under Chapter 7.

Under the new bankruptcy means test, if a debtor's income is in excess of certain thresholds, the debtor may not be eligible for Chapter 7 relief, and instead be forced to file for a Chapter 13 bankruptcy.

Chapter 13: Adjustment of Debts of an Individual With Regular Income

The formal title of a Chapter 13 bankruptcy, Adjustment of Debts of an Individual With Regular Income, pretty much states in a nutshell what the scheme behind Chapter 13 is all about.

Chapter 13 bankruptcy is designed for an individual debtor who has a regular source of income, whether it be from a job or social security benefits. Chapter 13 is often preferable to Chapter 7 because it enables the debtor to keep a valuable asset, such as a house when, for example, the equity exceeds the limits under the home state’s homestead exemption. A Chapter 13 bankruptcy also allows the debtor to propose a “plan” to repay creditors over time-usually five years. Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under the means test, which went into place in 2005 with the Bankruptcy Reform Act.

At a Chapter 13 confirmation hearing, required as the basis for the order approving the plan and ordering the creditors to accept it (the hearing is called a section 341 hearing, or simply, “the three forty-one”), the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors based on the debtor’s anticipated income over the life of the plan. Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while he plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under Chapter 13 than the discharge under Chapter 7.

Although it is now more difficult to qualify for a Chapter 7 and more people are required to enter into repayment plans, bankruptcy is still available to most people in need of its protection. Several types of bankruptcy are available, depending on your assets, income, and financial situation. Let Bills.com point you in the right direction, first to evaluate what your debt resolution options are, and whether you can avoid bankruptcy, and then to see if you can qualify for bankruptcy and what form is best suited for your needs. You will learn about the different types, the recent changes to the law, and which debts can and cannot be discharged. If you are ready to file, review our instructions on filing bankruptcy.

Be aware though, bankruptcy should be a last resort and will damage your credit score for up to 10 years. Be sure to also investigate if consolidating debts is an option that will help you avoid bankruptcy. Look at each bankruptcy alternative, so you can find the best way to solve your debt problems and protect your financial future. Review the Bills.com debt consolidation guide to see if this is an option for you. Lastly, seek counsel from an attorney with bankruptcy experience.

Comments (56)


Sarah K.
Raleigh, NC  |  January 14, 2012
I live in nc and I have a debt for around 20 thousand. I do not own nothing under my name except a bank account. I'm really thinking about bankruptcy, but there is one account that has my name and my husbands name on it. If I file bankruptcy would it affect him? There is one car under his name. My name is not on there. Also about 2 weeks ago I received a civil summon from a credit card company who been sending the bills to my old address so I forgot about it. I owe them $5,000 and I don't know what to do!! What can I do? Can I file bankruptcy without affecting my husband and what do I do about this civil summon?
Bills.com
January 17, 2012
Taking your name off of an account and then quickly filing bankruptcy could be viewed as an improper transfer of assets. I strongly recommend for you to speak with a bankruptcy attorney as soon as possible. You did not specify how much money is in the bank account. Ask the lawyer if there is a way to properly dissipate the funds in that account, if he advises that you can't immediately take your name off of the account. Maybe you could properly use the money to pay for the bankruptcy lawyer or for some of your fixed expenses such as housing, food and clothing, and transportation.
If you do not share the debts with your spouse and are not in a community property state, then your spouse should not be responsible for your debts. He will not be directly affected, but will be affected indirectly by however the bankruptcy affects you.
Terri M.
Newport, RI  |  October 27, 2011
I filed a chapter 7 bankruptcy last year and was discharged in December 2010. I have been making voluntary payments on my leased vehicle since then. I would like to surrender that vehicle now because although I have made payments on time they are not reporting them to the credit reporting agencies. I have decided to purchase another vehicle so I can start re-establishing credit. How will this surrender be reported by the lease company?
Bills.com
October 27, 2011
Did you reinstate the lease? A reinstatement is a document the debtor signs voluntarily to continue to restore personal liability for a liability discharged in bankruptcy. If you signed a reinstatement, then the default you plan will appear on your credit report. If you never signed a reinstatement, then a default or other derogatory will not appear on your credit report.
Chris A.
Houston, TX  |  September 29, 2011
My parents are looking into filing a bankruptcy without an attorney (as they cannot afford to hire one). They are elderly and only have social security income. They have one mortgage (60K) and an equity line of credit (35K) on their house which is now valued at around 100K. With the drought, their foundation has cracked, the floors have lifted and they cannot afford the 15K quoted to fix the foundation. They have decided to walk away from the house and wonder if it is possible in a Chapter 7 bankruptcy (they qualify based on income) There are no other assets beyond the house. Is there anything complicated to dealing with the two mortgages in a self filing?
Bills.com
September 29, 2011
I do not recommend pro per (do it yourself) bankruptcy filings. Bankruptcy law is technical, counter-intuitive in some places, full of jargon, and sometimes unnecessary. It may save money for your parents in the long run if they consult with a bankruptcy lawyer. Here, for example, if their only source of income is Social Security, and your parents otherwise have no assets, they may be considered "judgment proof" in their state of residence. A one-hour visit with a bankruptcy lawyer will reveal the costs and benefits to each of their options, including not filing at all.
Avatar
Chris A.
Houston, TX  |  September 29, 2011
Thank you for your reply. They earn so little income and have no assets so they are in fact judgement proof but they are old-fashioned and afraid of having the outstanding debts and creditors harassing them so prefer to do the bankruptcy. We simply do not have 1000$ for them to consult with an attorney. I understand that you do not recommend this. Could you advise though if there are special situations with 2 mortgages in a chapter 7? All I can find is information for those who want to keep their house in a Chapter 13 and strip off the 2nd lien. I'm hoping that the Chapter 7 will allow them to discharge both mortgages.
Bills.com
September 29, 2011
In a chapter 7 filing, there is nothing special or different about the debtor having liability for more than one mortgage or deed of trust. Each debt and creditor requires some work on the lawyer or paralegal's part, but a second mortgage is really just another line in a filing.

Consider the following thought: Call the county bar association in the county in which your parents reside. Ask for the names of the groups in the area that provide no-cost legal services to people with low and no income. Have your parents make an appointment with that organization, and ask them to bring all of the documents they can find relating to the mortgages to their meeting. The lawyer they meet will give them more precise advice than I can here, and may offer to file the chapter 7, depending on that organization's rules.

If the lawyer they meet cannot or will not file for them, then I recommend the Nolo Press series of bankruptcy books. Find these in large bookstores, or at the Nolo Press Web site. If your parents decide to file pro per tell them to be careful and methodical as they complete the filing. Most pro per filings fail, and I confess I do not know why, but I suspect it is due to sloppy or incomplete work.
Mike N.
Midlothian, VA  |  September 28, 2011
How far back do you have to report bills in a bankruptcy? I got a few back in 2003-2007. I don't see anything on my credit report about them but I don't want it to haunt me later.
Bills.com
September 28, 2011
Err on the side of caution. Include each and every debt you can find in your bankruptcy. When in doubt, add it to your filing. Be relentless and exhaustive in your search for old debts, and do not rely on your credit report as an authoritative or complete record of your debts.
Lise R.
September 16, 2011
Thanks for the informative post! I've also heard that before you file, it can be a good idea to consult with a bankruptcy attorney. Would you agree?
Bills.com
September 16, 2011
I always recommend people considering bankruptcy to consult with a lawyer experienced in bankruptcy law. The success rate in lawyer-filed bankruptcy cases is almost 100%, whereas the success rate of pro per bankruptcy filings is much less.
Melanie C.
Hoschton, GA  |  September 13, 2011
I an 42 years old and have almost $73,000 in Subsidized and unsubsidized Stafford Loans (Student Loans). I have no income and haven't for 8 years. I keep them in deferment or forbearance. What options, if any, do I have for these loans that have me overwhelmed? Is there a way to file bankruptcy on them?
Bills.com
September 13, 2011
If you are disabled, and your disability makes it impossible for you to work, then you may be able to discharge your student loan in bankruptcy.

If you are not disabled, then you are already exercising the options available to you to defer payment on your student loans.
Beejay R.
Glendale, CA  |  September 12, 2011
Hi, We used to have two loans with countrywide which were then turned over to bank of america, we applied for modification and was approved, the problem is that the 2nd loan is not included and it was sold to a collection agency, we are now and have been current with our principal loan/modification terms but we do not know what to do with the 2nd that is in collection, what would be the best way to deal with this? We tried contacting the collection agency and the amount they were asking us to pay for every month is close to $400 which is going to make the modification useless. We appreciate your help. Thank you.
Bills.com
September 13, 2011
I think your best step is to speak with a loan officer about a VA loan. He or she will run your credit and review your debt-to-income ratio and let you know if you need to pay down the car loans, to improve your DTI.

Make sure that you account for any taxes that may be owed on the stock sales, before you dispose of the funds.
Bills.com
September 13, 2011
The collection agent bought the collection account for a significant discount from the face value amount of the account. It probably paid no more than 10 cents on the dollar. The collection agent has the legal right to collect the face value balance of the loan, but given that it paid much less for the collection account, it has considerable room to maneuver. Negotiate a different monthly amount, or a lump-sum settlement.
Barbara T.
Clarksville, TN  |  August 29, 2011
My Chapter 7 Bankruptcy was discharged in 2009. It included both my mortgage and my Home Equity of Line of Credit (from the same lender). The property was foreclosed on (as expected), but shortly after that I began receiving collection notices for payment of the HELOC. When I questioned this, the lender told me that they have to foreclose on this loan in order to remove it from their books. I've never heard of this and I don't understand what there is to foreclose on. The lender already took the house and sold it! What's going on here? Is this normal or are they trying to pull a fast one?
Bills.com
August 31, 2011
I believe your obligation was discharged in the bankruptcy, but you need to review your bankruptcy paperwork to confirm this. Contact the attorney that handled your BK and find out what he or she says.
View All Comments
Thanks for your feedback!
 
Articles Ask Bill
Thank you for subscribing!