What Can Bankruptcy Do?

Bankruptcy filings are managed by the court system.

Bankruptcy has a negative connotation, but it is designed to aid individuals who are struggling to repay their debt obligations. Undergoing a bankruptcy requires significant time and restrictions, so it should not be undertaken lightly. For individuals with a high debt burden and no foreseeable way to repay the debt, bankruptcy can be a relief. Bankruptcy actions and benefits can vary based on the type of debt, chapter filing selected and whether the filing is for personal obligations or for a business.

Minimize or Reduce Debts

A Chapter 7 bankruptcy filing can eliminate some debts but requires surrendering assets. Filers may be allowed to keep a vehicle and a home, but the allowances vary from state to state. This type of bankruptcy is generally used when filers have few items of value and a high debt load. Student loan debt, child support, fraud-linked debt, alimony and some liabilities and fees will remain after a filing and cannot be discharged in most cases.

Adjust Debt

Chapter 13 bankruptcies allow individuals or couples to reorganize their debt into a repayment plan. The process can modify interest rates and restructure the debt into a payment plan based on their income. Some tax liabilities and unsecured debts may be eliminated or reduced. The bankruptcy filing requires creditors to work with the bankruptcy courts and debtors, which they may have been unwilling to do before a formal filing.

Discharge

Debts may be discharged during a bankruptcy proceeding. A legal discharge prevents creditors or debt collectors from soliciting or taking action to receive the financial obligation. Discharged debts are no longer the debtor's responsibility, but valid liens on property may remain as part of the bankruptcy court order. Discharging debt may require undergoing a debt repayment plan or a financial management course. After the discharge occurs, individuals are able to restart their financial lives.

Stop Collection Calls and Actions

A bankruptcy filing requires creditors to stop all collection attempts during the filing process. This requirement can eliminate bothersome phone calls, letters and other collection attempts by creditors and debt collectors. Minimizing calls can reduce the stress of financial problems. Stopping collection actions provides time to reorganize and assess the needed steps to get out of a high-debt situation.

Halt Home Foreclosure

Filing a Chapter 13 bankruptcy is one way to temporarily halt a home foreclosure. While the payment plan is being reviewed and organized, home foreclosure proceedings generally cannot continue. This action gives homeowners a little more time to determine their financial course of action. Generally, after the repayment plan begins, paying mortgage obligations on time is required to stay in the home.

References

• United States Courts; Discharge in Bankruptcy
• Bankrate.com; The Basics of Bankruptcy; Dana Dratch; June 2002
• United States Courts; Chapter 7
• United States Courts; Chapter 13