Learn Bankruptcy Facts & How They Affect You.

THIS IS A SUMMARY OF THE FEDERAL INSOLVENCY LAWS AND IS PROVIDED TO YOU AS GENERALLY GOOD ADVICE. IF YOU HAVE MATTERS RELATING TO THIS OR OTHER LEGAL SUBJECTS, BUT ARE NOT AN ATTORNEY, WE ADVISE YOU TO CONSULT WITH ONE.

People who have problems paying their bills, especially those facing garnishment or repossession, often consider declaring insolvency. This page provides guidance on the basics of bankruptcy law.

What is it?

Bankruptcy is a way to temporarily suspend (during the course of the proceeding), and later prevent, all debt collection actions for debts you had at the time you filed your bankruptcy petition.

Once a person files for bankruptcy, the federal court grants an "automatic stay." This prevents creditors from attempting to collect on any outstanding debts. Creditors may petition the court for relief from the automatic stay. Often, creditors whose loans are secured by property are permitted to take possession of that property.

Bankruptcy Facts About Discharge

At the end of the legal proceedings, the "bankruptcy adjudication" (a finding that a person is "bankrupt") discharges the person’s debts. The discharge acts as a forgiveness of personal liability for all debts incurred prior to filing. In most instances, creditors can’t try to collect debts that have been discharged. Once discharge is granted, former creditors also have no claim on future income.

In exchange for this "fresh start," a debtor must turn over all non-exempt property to a court-appointed trustee (see Chapter 7 below). The trustee is required to sell the property and distribute the proceeds to the creditors.

A debtor can be denied a discharge for certain "bad acts" such as concealing or fraudulently transferring assets prior to filing.

Even if a discharge is granted, certain debts can never be discharged. These include: alimony and child support, student loans, taxes, and any debt incurred through the debtor's fraud or theft.

Your Filing Options

Individuals may choose several different types of bankruptcy based upon the amount and nature of the debts, the exemptions available, and the types of assets they own. The different bankruptcies are named after the corresponding chapter in the code.

Chapter 7 is referred to as "straight" or "liquidation." In a liquidation, the debtor turns all of their assets over to a trustee.

The trustee then liquidates (sells) all the assets and distributes the proceeds to the creditors. The person is then discharged of all debts, except those which cannot be discharged.

Creditors must look solely to the assets held by the trustee for payment. Creditors can’t come back later and try to collect their claims from the discharged debtor. A debtor can receive a Chapter 7 discharge once every seven years.

Chapter 13 debtors pay their debts through future income rather than liquidation of their current assets. This chapter usually allows the debtor to keep much of his or her property.

Under Chapter 13, the debtor presents a plan for repayment, which is reviewed by the trustee, the creditors, and the Bankruptcy Court.


Over time, the plan must provide creditors with an amount at least equal to what they would receive under a Chapter 7 filing, and must be feasible based on the debtor's income. If the plan is approved, the debtor makes payments to the trustee, who then pays the creditors. Plans usually run at least three years, and cannot run longer than five years.

While a debtor under Chapter 13 gets to keep much of his or her property, there are certain disadvantages:

• Debtors remain under court supervision for the life of the plan (up to five years), and are forbidden to make new debts or sell assets without court permission.
• Debtors who propose less than full payment to unsecured creditors will be forced to live on a budget for the life of the plan and pay all excess income to the creditors.
• Even if the debtor pays all of the creditors in full, the bankruptcy will still appear on the debtor's credit record.
• If the debtor doesn’t complete the plan payments, then any creditor may petition to have the court convert the case to a Chapter 7 liquidation.

Chapter 11 is a reorganization proceeding, usually involving corporate debtors. It’s also available to individuals who have engaged in commercial enterprises. This chapter is used when the owner desires to stay in business, restructure existing debts, retain assets, and attempt to reorganize under court supervision.

Bankruptcy Facts About Taxes

Filing bankruptcy under either Chapter 7 or Chapter 11 will stop all IRS or state tax collection activities. But if a Chapter 7 is filed, the tax collection activities resume shortly after filing because the tax obligation cannot be discharged in bankruptcy. Furthermore, interest and penalties continue to accrue. Under Chapter 13, on the other hand, filing halts the accumulation of interest and penalties, and taxes may be paid over the life of the plan.

What About Co-Debtors?

A bankruptcy filing often involves other persons who have cosigned notes or mortgages with the debtor. The filing of a Chapter 13 plan can be used to stop all creditor actions against certain co-debtors. This is true even if the co-debtors are solvent and do not join the Chapter 13 petition. This protection can become permanent if the plan provides for payment of the cosigned debt in full and is fully performed.

How Filing Affects Your Credit

Not all creditors react the same way to bankruptcy, but your credit will be hurt. This does not mean that you will not be able to obtain credit. Some companies extend credit to individuals that have declared bankruptcy because they know that you can only file bankruptcy once every seven years. However, you can expect the interest rates on such credit to be high.

What If You Need To File?

Take a few moments now to complete the form below to locate a qualified bankruptcy attorney in your area.



Please allow a few moments after you submit the form for it to be processed. Leave the screen open and your attorney contact information will appear shortly.

Facts On Alternatives

Contact your creditors, explain the situation, and ask them to restructure your debts so that you can meet the revised payments.

Find out if you can reduce your monthly debt payments by up to 57%! Get real help that will assist you in finding a way to pay your debts and negotiate with your creditors.

Compare your options to consolidate debts.

Related Articles

How to avoid bankruptcy, your alternative bankruptcy options.

Filing for Personal Bankruptcy is a last resort, learn what happens and what you can do for permanent debt relief.

Bankruptcy Facts, summary of the laws, chapters, and alternatives.

Bankruptcy isn't for everyone. Free tips and information about bankruptcy, what it does and does not do for debt relief.

Bankruptcy Law doesn't have to be confusing. Learn the basics, and what's involved in filing bankruptcy. Free introduction and tips.

Filing Bankruptcy facts including the pros and cons of taking this drastic action for debt relief.

Answers to your questions on whether to file, when to file and a lot more!

Learn about the new laws and why they may lead to more informal bankruptcies than official ones!

Bankruptcy and credit report updates ... how does filing affect your credit report?

Bankruptcy Forms and how to find a qualified bankruptcy attorney in your area.

Improving Credit Score After Bankruptcy.

Declaring personal bankruptcy ... which type is right for you?

Many people are finding relief and saving their homes. How can bankruptcy stop foreclosure?

Getting The Answers You Need

Be sure and check out the various debt solution reviews, tips, and articles provided on DebtSteps.com:

Find Your Solution offers a comprehensive list of reviews to get out of debt once and for all. Get answers on bankruptcy, consumer credit counseling, debt settlement, money management, budgeting, loans and mortgages.

Debt Relief Tips & Articles to guide you on your way to financial freedom. Get the lowdown on dealing with debt collectors, handling money problems, understanding your credit, and more.