What Can Bankruptcy Do for Me?

Bankruptcy can be a very powerful tool for you and your family when faced with a serious debt problem. Through bankruptcy a person can do the following:

Wipe out unsecured debts

Bankruptcy can eliminating unsecured debt. Essentially, a debt is unsecured if a person or organization does not have collateral or a mortgage on your assets. The most common example of unsecured debt is in the from credit cards. (To learn more about the difference between secured and unsecured debt, see "What Is The Difference Between A Secured And Unsecured Creditor?")

When this debt is eliminated, your debt is “discharged”; meaning that you no longer have a legal obligation to repay those debts. Bankruptcy is designed to give you a fresh financial start.

Stop foreclosure on your home

When a Chapter 7 or Chapter 13 bankruptcy is filed, an “automatic stay” immediately goes into effect, stopping almost all collection efforts from your creditors. With few exceptions, the automatic stay will protect you from collection efforts, such as a home foreclosure. This is a powerful tool and is triggered simply by filing the bankruptcy and does not require any action by a judge or other legal procedure to become effective.

Prevent repossession of a car or other property.

Once a bankruptcy is filed, a creditor is not allowed to repossess the property, with very few exceptions. If it has already been repossessed, the creditor is forced to return the property (usually within a 10-day redemption period).

In a personal bankruptcy reorganization (Chapter 13) you make payments to a trustee, who turns around and makes disbursements to your creditors. While you are waiting for your bankruptcy plan to be confirmed by the court, some of your creditors will receive “protection payments,” especially if they have a lien on your car which may be depreciating. If you do not make the “protection payments”, then the auto lender could ask the judge for special permission to repossess the car. Later, once your bankruptcy plan is confirmed with the judge, you can keep the car by paying the proper claim amount.  (To learn more about your property during bankruptcy, see “What will happen to my home and car if I file for bankruptcy?”)

Stop debt collection harassment and wage garnishment.

The most powerful and immediate protection in bankruptcy is the “automatic stay,” which stops most collection efforts. When you file for bankruptcy, your attorney gives a list of your creditors and their addresses to the court. The court will then notify each creditor of your bankruptcy. The creditor must then stop garnishing your wages (with very few exceptions such as ongoing child support). Additional debt collection efforts will be considered a violation of bankruptcy laws, unless they obtain specific permission first. There are strict penalties to creditors that engage in knowing violation of the automatic stay in bankruptcy. (To learn more about collection harassment after filing Bankruptcy, see “Creditor Calls After Bankruptcy?”)