Bankruptcy is a legal action to help people with debt problems. A person owing money can often get a court order that they no longer owe their debts (Chapter 7 bankruptcy) or they can get a court order that lets them pay their bills in whole or part over 5 years (Chapter 13 wage earner plan) while protecting them from their creditors.
If you are being garnished, a bankruptcy can stop it and can sometimes even get back the money. If your home is threatened with foreclosure, a chapter 13 bankruptcy can prevent a foreclosure. Chapter 13 may be the only way to save your home. If you are behind on your car payments or if a creditor is threatening repossession, a bankruptcy can stop that. If you owe taxes, and the IRS is threatening to garnish or seize your assets, a bankruptcy may be the only effective way of dealing with the IRS. If your debts are overwhelming, and you can see no way out, bankruptcy can give you a fresh start. If your income has declined so that you can't meet your obligations, bankruptcy can reduce your obligations, or possibly eliminate some of them, so you can support yourself in a reasonable and dignified manner.
Debts not discharged in bankruptcy include alimony, child support, taxes due less than three years, student loans, criminal restitution, debts resulting from driving while intoxicated, debts arising from fraud, debts from substantial uses of credit cards just prior to filing bankruptcy, and debts from willful and malicious damage to others or their property. There are other smaller exceptions. The exceptions to discharge are often hard to understand and apply, and the way judges apply the exceptions varies from state to state. This is an area where the advice of an experienced bankruptcy attorney is usually required. Do both husband and wife have to file bankruptcy? Married people can file separate bankruptcies, or one spouse can file bankruptcy alone. However, if both spouses are responsible for an obligation, and only one spouse files for bankruptcy, the other spouse will still owe the debt. The creditors will have the right to come after the non-filing spouse as if a bankruptcy had not been filed. In circumstances where parties have recently married and most of the debt is from only one of the spouses, only the spouse that owes the debt needs to file bankruptcy.
Chapter 7 is often called full bankruptcy, and Chapter 13 is often called a wage earner plan. The main difference is that in Chapter 7 the bills are wiped out right away with a court order, and you don't pay anything on them, while in Chapter 13 you make payments for 3 to 5 years although you do not necessarily have to pay them in full. Both Chapter 7 and Chapter 13 end with a court order called the discharge that says you don't owe the bills anymore. People often mistakenly believe you have to pay your debts in full in Chapter 13. Actually you are only required to pay what you can reasonably pay for at least 3 years to get out of debt in Chapter 13. Under Chapter 13 you can catch up on your home mortgage, renegotiate your student loans, pay back delinquent taxes over time or pay back your car. You can force a creditor to accept payments in an amount usually much lower than you are paying outside Chapter 13.
A bankruptcy discharge will remain on your credit report for 7 to 10 years, but will eventually improve your credit rating. Credit ratings are computed in part by looking at how much debt you have as compared to the amount of credit you have unused. Before bankruptcy people often have several maxed-out credit cards, and it is these credit cards that are giving them the bad credit rating because they have much more debt than credit. A bankruptcy discharge creates the opposite situation by wiping out these debts, so that the filer has not used any of his available credit. Think about it from the lender's point of view, would you rather lend to someone who already owes thousands of dollars to others, or to someone who has no other debts, but just filed bankruptcy? Most of our clients receive credit card offers within the month after they file bankruptcy, and many get home mortgages within 2 to 3 years of their discharge. The best way to maintain your credit rating in the face of mounting debt is to file bankruptcy immediately and start over rather than struggle over time to attempt to pay off debts that are constantly increased by late fees and interest.
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