Bankruptcy Overview & Information

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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 called Liquidation.

A Chapter 7 is a 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. Some assets may be protected from creditors, based on state law. This means a court appointed trustee can sell everything you own to pay off your creditors, except property that 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.

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 what 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 for people with valuable assets, because it enables the debtor to keep the asset. A common example is for someone who owns a home where 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. Before file for bankruptcy, investigate whether consolidating your debts is better solution, one that may 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.

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Comments (79)


KAYDEE S.
Fort Worth, TX  |  October 29, 2013
I filed bankruptcy in May 2013. Can I improve my credit score with the bankruptcy on my file?
Bills.com
October 31, 2013
Focus on creating positive history in your credit report. I have a two-part answer to your question.

Chapter 7: Let's assume you had a chapter 7 that has been discharged. If you have any zero-balance credit cards that are still open, use them sparingly and be sure to make your payments on time. Keep your credit utilization low (don't max-out the cards). If you have a mortgage or student loan payments that were not discharged in the bankruptcy, continue to pay those on time every month. If you have any questions about which debts you should or should not pay, ask your bankruptcy lawyer. Paying debts discharged in bankruptcy will not improve your credit score.

Chapter 13: If you have a chapter 13 and are now in a court-supervised payment plan, consult with your lawyer before you apply to open any new accounts.
Nathan M.
Durango, CO  |  August 24, 2013
I was recently discharged from all debts via a chapt. 7 Now I am interested in removing the closed debts from my report and or is it necessary for a future mortgage consideration, to have this done. I am also building my credit through my bank.
Bills.com
August 26, 2013
The accounts included in your BK will remain on your report. They should show that they were discharged due in the BK.

Your main focus should be on establishing new lines of credit, paying them on time, avoiding running up debt, and controlling your credit utilization. Please read the Bills.com article about rebuilding your credit after bankruptcy.
Charles N.
Saint George, UT  |  April 15, 2013
This was some really helpful information! Especially the section on chapter 13 bankruptcy. Thanks for informing the public on this. It really is nice to have so much knowledge, right at your fingertips.
Stacey T.
Tucson, AZ  |  June 29, 2012
I am an American who will marry a Canadian soon. I filed chapter 7 in the US a year ago. I was told it won't affect me in Canada since I have to build Canadian credit. Is that true? Also, how will my bankruptcy affect my Canadian husband? We will reside in Canada.
Bills.com
June 29, 2012
There is a theoretical possibility the Canadian credit reporting agencies could connect the dots and determine you are the same Stacey T. who filed bankruptcy in the US a year ago. As a practical matter, I do not believe the credit reporting agencies are advanced enough to do so. (Readers, please chime in if you have experience to the contrary.) As a result, your credit file in Canada will start with a blank slate.

Your US bankruptcy as a single person will have zero impact on your future spouse, whether he or she is American, Canadian, or a citizen elsewhere.
Michael G.
Cincinnati, OH  |  May 29, 2012
Can anyone tell me if i can file chapter 7 or 13 on my medical bills? I have about $60 grand total in debt but i am also disabled and receive about $1,000 a month. I really would like to improve my credit but i am not sure what i should do? Would I be a candidate for 7, 13 and if so would i do i choose. Do you know if there are lawyers that deal with this stuff for low-income individuals?
Bills.com
May 30, 2012
Please see the Bills.com resource Means Test for Bankruptcy to learn if you qualify for a chapter 7 or 13 bankruptcy.

Contact your country bar association to learn the name of the organization in your area that provides No-cost legal services to people with no or low income in your area. Make an appointment with that organization, and bring all of your documents relating to your debts to your meeting. The lawyer you meet will advise you accordingly.
Holly D.
Los Angeles, CA  |  May 21, 2012
I filed for bankruptcy in 2008. It was dismissed in late November 2008 as I decided not to pursue it further. It still appears on my credit report. How long are dismissals reported on credit reports? Is there anything I can do to eliminate the report of the bankruptcy dismissal on my credit report?
Bills.com
May 21, 2012
I am not optimistic you can dispute a public record entry on your credit report successfully. However, there is no harm and little cost to try. See the article I just mentioned to learn how.
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Holly D.
Los Angeles, CA  |  May 30, 2012
Another question or two or four - sorry - this website is so incredibly helpful. I want to make sure that the SOL (CA) has passed of four years. I stopped paying all credit cards in March/April 2008. I filed for bankruptcy in June 2008 and it was dismissed in November 2008. I have done nothing to pay most of my debts since then (I negotiated a settlement with two of the credit cards), but have one very large debt (30K+) still outstanding with a large bank. For some unknown reason (the Good Lord smiled down on me), they never came after me for the money. The large debt with the large bank shows on my credit reports: "debt included in or discharged through Bankruptcy Chapter 7" and "included in bankruptcy" and "unrated or bankruptcy." Am I safe to assume the SOL has passed and they cannot successfully collect the debt? If so, is there anything you recommend me do to start to clean up my credit report. I went through an awful and traumatic divorce that left my finances in shambles. I would really like to improve my score as I've been living without any sort of credit for the last 4 years. I do not want to rack up any more credit card bills (I've learned my lesson) but I would like to buy another house some day. (I had to short-sell my house in 2008 as part of my divorce.) ANy advice would so very much appreciated.
Bills.com
May 30, 2012
I will assume you really meant "dismissed" when you used that word, and did not mean to say "discharged." A bankruptcy court may dismiss a case it finds defective. Alternatively, a bankruptcy court will discharge debts at the conclusion of a successful bankruptcy filing.

Under some state laws, the clock on a statute of limitations for a breach of contract will be paused during some legal actions, such as a bankruptcy filing. This pause is called "tolling." If your state has such a tolling rule, the statute of limitations would have an additional 5 or 6 months, depending on the exact dates of filing and dismissal.

You indicated you reside in California, which has a four-year statute of limitations for breach of written contracts. See the Bills.com resource California Collection Laws to learn more about California's rules. Here in your case, the statute of limitations would probably run for four years from the date of breach (the date you missed the payment) plus five or six months. I wrote "probably" because it is possible you may have agreed to use another state's rules when you signed the contract for the credit card. If there is a choice of laws clause in the contract for another state, the credit card issuer may try to argue to a California court that a different set of laws may apply to your case, should the case ever go to trial.

In all states but Mississippi and Wisconsin, the passing of a statute of limitations for a breach of contract does not mean the debt is canceled, or no longer collectible. The statute of limitations is an affirmative defense a defendant can raise in a trial to ask the judge to dismiss a case. Unfortunately, some Internet commentators over-simplify the statute of limitations defense into something like, "when a statute of limitations passes a debt is no longer collectible," but that is untrue. It is a defense and nothing more, except in the two states I just mentioned, where it is a barrier to collections.

See the Bills.com resource 7 Techniques to Improve Your Credit Score to learn how to raise your credit score.
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Holly D.
Los Angeles, CA  |  May 30, 2012
Yes, I did mean dismissed. I did not qualify for chapter 7 bankruptcy because of my income. The trustee moved to have my case changed to a chapter 13 bankruptcy. I elected not to pursue the chapter 13 and 1) wait to see what the creditors would do and 2) work the debts out myself. I appreciate the information re: the tolling of the SOL re: my bankruptcy. I think I will not awake the sleeping giant and hold out until November until I do anything further with my credit.
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Holly D.
Los Angeles, CA  |  May 30, 2012
Also, what about this law that says the SOL is governed by where I live and signed the contract - which is the state of CA: What state should I use in figuring out the Statute of Limitations? The state statute can be either where the debtor lives or where the contract was entered into. The creditor does have the right to choose the state with the longer statute but the creditor's or collector's location is moot. This is covered in Section 811 of the FDCPA and in Consumer Credit Protection Sec. 1692i. Here is the rule; CONSUMER CREDIT PROTECTION Sec. 1692i. --2) in the case of an action not described in paragraph (1), bring such action only in the judicial district or similar legal entity - (A) in which such consumer signed the contract sued upon; or (B) in which such consumer resides at the commencement of the action
Bills.com
May 31, 2012
We are at a tricky intersection of contract law and civil procedure rules, with the added twist of a federal rule — the FDCPA. The FDCPA rule you mentioned sets the venue of the action. The venue, the rule you quoted states, must be in a forum convenient to the defendant now, or where the contract was signed. However, in contract law, the parties are free to decide in advance which state laws they will follow if there is ever any litigation that arises from the contract. This means that if you sign a contract that says, "If there is ever a controversy arising from this contract, we will agree to use State A law," that means even though you reside in State B and an action is brought against you there, you have agreed to use State A's rules.

Where this gets complicated is local judges will often try to find ways to avoid following choice of laws clauses in contracts, and usually use public policy or fairness arguments to get around them. Instead, judges will use their local, familiar laws.

My point is, just because a trial occurs in State A, it doesn't necessarily mean the court will follow all of State A's rules.
Stephen B.
T/o Stroud, PA  |  May 19, 2012
I have over 40,000 in credit card debt. I don't own my home or my car. I lost my job last year and was able to find something at one third of my salary. My wife is out of work. Should I take my 401-k and pay what I can. I know the tax ramifications of early withdrawal and I would be left with nothing for retirement.
Bills.com
May 21, 2012
Stephen, your retirement accounts should be beyond the reach of any creditor, so I don't think that tapping into them to repay your debts is a good option.

I suggest that you speak with a debt settlement firm and with a bankruptcy attorney. If the monthly payment for the settlment program is unaffordable, then bankruptcy becomes a more attractive option.
Lawrence B.
February 20, 2012
I've been looking into my options with my high debt, and bankruptcy seems like a pretty valid option. I know that it's a last resort and will affect my credit for ten years, but I'm not sure what to do about the loans that I can't pay off. I've been looking into a bankruptcy attorney a for a consultation. This article has helped me clear up some of my doubts, but also brought up more. Thanks for covering so many of the complications with debt and bankruptcy.
Christine M.
Watsontown, PA  |  February 12, 2012
My husband and i split after 17 years he moved back to Mexico and left me with over $16,000 in credit cards and loans. I have never been late on a payment but i just can't live with 2 kids with what i have left the cards are $640.00 a month and loans are $200.00 a month..I am listed on the llc of the insurance office my dad started..i am on the house the office is in which still has a mortgage on it and also listed on the land we owe as a family ..i have tried to get loans to consolidate using the office building and the land but no bank will help me..I am thinking of bankruptcy. Is this something i could do being listed on 2 properties?
Bills.com
February 13, 2012
Consult with a bankruptcy lawyer who will evaluate your financial situation, including your assets and debts. I recommend that you read about other debt relief options, including debt settlement.
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.
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