Personal bankruptcy—unlike a business bankruptcy—allows an individual or married couple to get out from under burdensome consumer debt incurred for family, household, or personal purposes. Both Chapter 7 and Chapter 13 bankruptcy are personal bankruptcy chapters that effectively provide individuals with a fresh financial start.
(For additional information about the benefits of bankruptcy, read What Filing for Bankruptcy Can (and Cannot) Do for You.)
Personal Bankruptcy Stops Collection Activity
Once you file for bankruptcy, the court issues an order—known as an “automatic stay”—that prohibits creditors from contacting you. The automatic stay can stop your house from being sold at auction, prevent your employer from deducting wages from your paycheck, and excuse you from a mandatory attendance at a deposition or other lawsuit-related appearance. It’s a powerful tool.
After filing for bankruptcy, all collection actions, including the following, must come to an abrupt halt:
- creditor calls and letters
- vehicle repossessions
- wage garnishments
- foreclosures, and
- lawsuits seeking monetary reimbursement.
The reprieve might be temporary, however. Even though filing for bankruptcy stops creditors in their tracks, it doesn’t fix all problems. For instance, a lender can ask the court for permission to “lift the automatic stay” and proceed (continue) with a foreclosure sale or lawsuit. The court will likely grant a mortgage lender’s request if the filer can’t bring the payments current and the property lacks equity that could be used to cover the missed payments. To find out more about why you can’t keep your house if you’re unable to pay your mortgage payments, see Secured Claims and Liens in Bankruptcy.
Personal Bankruptcy Wipes out Certain Debts
Getting out from under debt is the primary reason people file for personal bankruptcy. The debt that you can discharge (wipe out) includes:
- credit card bills
- medical bills
- utility bills
- personal loans, such as payday loans, and
- gym memberships.
Bankruptcy doesn’t get rid of all debt, however. For instance, filing for bankruptcy won’t relieve you of past due domestic support obligations, such as spousal or child support. Additionally, most back taxes, student loans, and fines and penalties owed to the government are not discharged in bankruptcy—although exceptions exist. To learn more about debts that you’ll likely remain responsible for after your discharge, read Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.
Personal Bankruptcy Chapters
Before filing for bankruptcy, you'll choose which bankruptcy chapter is best for you: Chapter 7 or Chapter 13 bankruptcy. Each type has different qualification requirements and solves particular debt problems. The chapter you choose will likely depend on the following factors:
- the debt that you owe,
- how much money you make, and
- the amount of property you own.
For instance, people with an average (or less) income can file for Chapter 7 bankruptcy and discharge particular types of debt without paying into a monthly repayment plan. Higher income earners must pay back a portion of their debt over the course of a three- to five-year Chapter 13 repayment plan.
If you’re not sure which chapter is right for you, consult with a local bankruptcy attorney. To find out what you should take to your consultation, read Bankruptcy: Preparing to Meet with a Lawyer.
Questions for Your Attorney
- Would filing for bankruptcy help resolve my financial problems?
- Which bankruptcy chapter would best fit my needs?
- Will I have to pay all of my bills through a Chapter 13 repayment plan?