Should I File for Bankruptcy FAQ

Deciding if bankruptcy is right for you? Here are answers to your most common questions.

If I file for bankruptcy, can I keep my property?

If you file for Chapter 13 bankruptcy, the answer is yes. In Chapter 13 bankruptcy, you repay all or a portion of your debts through a repayment plan over three to five years. In exchange, you can keep your property, including your car and home, assuming you keep up with payments on any loans secured by the property, such as your mortgage or car payment, and catch up on payments you fell behind on before filing for bankruptcy.

Your plan will also have to ensure that your creditors will get as much in Chapter 13 bankruptcy as they would have received in Chapter 7 bankruptcy. For instance, if you own $10,000 worth of "nonexempt" real estate you can't protect with a bankruptcy exemption, your plan will have to pay your unsecured creditors at least $10,000 (minus costs of sale and the trustee's commission).

In Chapter 7 bankruptcy, you ask the bankruptcy court to "discharge" or erase most of the debts you owe. In exchange for this discharge of qualifying debts, the bankruptcy trustee managing your case can take any property you own that isn't exempt, sell it, and distribute the proceeds to your creditors.

What property is exempt from collection depends primarily on state law. Typically, exemptions protect some equity in your home and car, retirement funds, public benefits, and most household goods, furniture, necessary clothing, appliances, and books.

I'm facing foreclosure and want to keep my home. Is bankruptcy my best option?

Filing for Chapter 13 bankruptcy can be an excellent way to save your home from foreclosure. Chapter 13 bankruptcy lets you pay off late, unpaid mortgage "arrearages" over the length of a repayment plan, which will be three or five years.

For this option to work, you'll need enough income to pay your current mortgage, any mortgage arrearages, and other required payments. Learn more about saving your home in Chapter 13 bankruptcy.

In Chapter 7 bankruptcy, if you have a lot of equity in the home and can't protect it with a bankruptcy exemption, the bankruptcy trustee will sell your house to repay unsecured creditors.

Even if you can protect all of your equity, if you're behind on your payments, you'll likely lose your home because Chapter 7 doesn't provide a way to catch up. The lender can either get permission from the bankruptcy judge to go ahead with a foreclosure or continue foreclosing after your Chapter 7 case ends. Learn what happens to your home in Chapter 7 bankruptcy.

If your only Chapter 7 bankruptcy goal is saving your home, there's a good chance you'll be better off filing for Chapter 13 or considering other alternatives first. You might be able to deal with arrearages by negotiating with your lender outside of bankruptcy or modifying your loan terms. Read more about ways to save your home and how to avoid foreclosure.

I'm in over my head with debt and just lost my job. Should I file for Chapter 7 bankruptcy?

If you think you'll incur significant debts soon, such as medical bills or unpaid lease payments, waiting to file for Chapter 7 bankruptcy might make sense. Although bankruptcy will discharge many current debts, debts incurred after filing for bankruptcy won't go away.

Also, you won't be able to file another Chapter 7 bankruptcy for eight years, so you'll be on the hook for those debts for a long time. Learn when it makes sense to delay your bankruptcy filing and whether you should file bankruptcy now or wait.

Debt collectors won't leave me alone! Will bankruptcy stop the harassment?

Yes, bankruptcy's automatic stay stops your creditors by requiring most creditors and debt collectors to stop all collection efforts against you until the bankruptcy is over. But if all you want to do is stop debt collectors from contacting you, there is an alternate route.

Under the Fair Debt Collection Practices Act, you can send a letter stating that you want the collection agency to stop communicating with you. All agency employees will be prohibited from contacting you, except to tell you that collection efforts have ended or that the collection agency or original creditor intends to sue you or take advantage of some other legal remedy.

Keep in mind that this remedy only applies to debt collectors. Creditors can continue to contact you (except in some states that extend this remedy to the original creditor and collection agencies). To learn more about dealing with debts and debt collection agencies, see Debt Management.

To Learn More

For clear-cut answers, information, and strategies needed to figure out whether bankruptcy is the right solution for your debt problems, see The New Bankruptcy: Will It Work for You? by Cara O'Neill (Nolo).

Will all of my debts be canceled in bankruptcy?

It depends on the type of debt you have. Filing for bankruptcy provides an excellent way to eliminate debt such as credit card balances, medical debt, and mortgages and car loans after losing a home to foreclosure or a car to repossession.

In a Chapter 7 bankruptcy, the court discharges qualifying debt at the end of your bankruptcy. In Chapter 13 bankruptcy, you pay some or all debt through your repayment plan.

Keep in mind that if you have debts secured by property, such as your home or car, the cancellation of the debt doesn't mean you get to keep the property. Find out about the differences between Chapters 7 and 13.

Some debt is never "discharged" or canceled in bankruptcy, including child and spousal support arrears, student loans (except in limited circumstances), and tax debts due within the previous three years. Learn more about which debts you can erase and what bankruptcy can and cannot do.

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