Prevent a Foreclosure, Repossession, or Eviction
Once filed, the court puts in place an order called the automatic stay. The automatic stay will stop all of these actions as long as they are still pending.
- Evictions. An eviction still in litigation will come to a halt after a bankruptcy filing. But the stay will likely be temporary. Keep in mind that if your landlord has an outstanding eviction judgment against you, a bankruptcy will not help most situations.
- Foreclosure and repossession. Although the automatic stay will stop a foreclosure or repossession, filing for Chapter 7 will not help you keep the property. However, Chapter 13 has it is possible you will be allowed to catch up on past payments so you can keep the asset.
How quickly your debt will get wiped out will depend on the chapter you file:
- Chapter 7 bankruptcy. This chapter takes an average of three to four months to complete.
- Chapter 13 bankruptcy. If you file for Chapter 13 rather than Chapter 7, you will likely have to pay back some portion of your unsecured debts through a three- to five-year repayment plan.
Wipe Out Secured Debt
If you cannot afford a payment that you secured with collateral—such as a mortgage or car payment—you can wipe out the debt in bankruptcy. But you will not be able to keep the house, car, computer, or other item securing payment of the loan
Here are some of the things that Chapter 13 can do.
Stop a mortgage foreclosure. Filing for Chapter 13 bankruptcy will stop a foreclosure and force the lender to accept a plan that will allow you to make up the missed payments over time (you’ll also have to stay current on your regular monthly payments). To make this plan work, you must be able to demonstrate that you have enough income to support such a repayment plan.
Allow you to keep property that is not protected with a bankruptcy exemption. No one gives up everything that they own in bankruptcy. You are allowed to protect (exempt) items you will need to work and live using bankruptcy exemptions. A Chapter 7 debtor gives up nonexempt property, but not a Chapter 13 filer. This does not mean that you get to keep more assets, however. You will need to pay the value of any nonexempt property to your creditors in your repayment plan.
What Bankruptcy Can’t Do
Prevent a secured creditor from foreclosing or repossessing property you cannot afford. A bankruptcy discharge eliminates debts, but it does not eliminate liens. A lien allows the lender to take property, sell it at auction, and apply the proceeds to a loan balance. For example, if you file for Chapter 7 bankruptcy, you can wipe out a home mortgage; however, the lender’s lien will remain on the home. As long as the mortgage remains unpaid, the lender can foreclose on the home (once the automatic stay lifts, of course).
Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy, so you will continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, you will have to pay these debts in full through your plan.
Eliminate student loans, except in extremely limited circumstances. Student loans can be discharged in bankruptcy only if you can show that repaying the loan would cause you “undue hardship,” which is a very tough standard to meet. You must prove that you cannot afford to pay your loans currently and that there’s truly little likelihood you can do so in the future.
Eliminate most tax debts. Eliminating tax debt in bankruptcy is not easy, but it’s sometimes possible for older unpaid tax debts.
Eliminate other non-dischargeable debts. The following debts are not dischargeable under either chapter:
- Debts you forget to list in your bankruptcy papers (unless the creditor learns of your bankruptcy case)
- Debts for personal injury or death due to intoxicated driving, and
- Fines and penalties imposed as a punishment, such as traffic tickets and criminal restitution.
If you file for Chapter 7, these debts will remain when your case is over. In Chapter 13, you will pay these debts in full through your repayment plan.
Debt related to fraud might or might not get eliminated. A fraud-related debt will not be discharged if a creditor files a lawsuit (called an adversary proceeding) and convinces the judge that the debt should survive your bankruptcy