What Bankruptcy Can and Can’t Do: The Honest Truth

I want to tell you something that might surprise you: bankruptcy isn’t the end of the world. In fact, for many people drowning in debt, it’s a lifeline. But here’s the thing – there’s a lot of misinformation out there about what bankruptcy can and can’t do.

Some folks think it’s a magic wand that’ll make all their debts disappear. Others believe it’s a one-way ticket to financial ruin. The truth? It’s somewhere in between. Bankruptcy can be a powerful tool, but it’s not a cure-all. Ready to separate fact from fiction? Let’s dive in.

What Bankruptcy Can Do

If you’re drowning in debt, bankruptcy can throw you a lifeline. I’ve seen it firsthand. Let’s explore. 

Stop Creditor Harassment and Collection Activities

The calls, the letters, the threats – it’s enough to drive you insane. But here’s the thing: filing bankruptcy triggers an automatic stay. This legal action forces creditors to halt collection attempts immediately. That means no more phone calls interrupting dinner. No more threatening letters piling up in your mailbox. Just sweet, blissful silence while you get your financial ducks in a row.

Eliminate Credit Card Balances and Most Unsecured Debts

Bankruptcy is like a magic eraser for certain types of debt. Chapter 7 bankruptcy can wipe out credit card balances, medical bills, and other unsecured debts in a matter of months. Imagine the weight lifted off your shoulders when those suffocating balances disappear. It’s like hitting the reset button on your financial life.

Provide a Fresh Financial Start

Bankruptcy isn’t just about eliminating debt – it’s about giving you a clean slate. A chance to rebuild and start anew. The Supreme Court has even said that a central purpose of bankruptcy is to give debtors a “fresh start”. It’s an opportunity to learn from past mistakes, make better choices moving forward, and create a more stable financial future. So don’t think of bankruptcy as the end. Think of it as a new beginning – a second chance at financial freedom.

What Bankruptcy Cannot Do

Bankruptcy is powerful, but it’s not a magic wand. There are some debts and obligations it simply can’t touch.

Discharge Child Support and Alimony

If you’re behind on child support or alimony, don’t expect bankruptcy to save you. These debts are considered “priority debts” and cannot be discharged under any circumstances. You’ll still be on the hook for every penny owed, even after bankruptcy. So if you’re struggling to keep up with these payments, it’s crucial to explore other options like modifying your support agreement.

Eliminate Student Loan Debt

For many Americans, student loans are a crushing burden. Unfortunately, bankruptcy rarely offers relief. With very few exceptions, student loan debt cannot be discharged in bankruptcy. You may be able to temporarily delay payments through the automatic stay, but your balance will be waiting for you on the other side. The only way to eliminate student loans in bankruptcy is by proving “undue hardship” – a nearly impossible standard to meet. For most people, student debt follows you for life, bankruptcy or not.

Wipe Out Secured Debts Without Surrendering Property

Secured debts, like car loans and mortgages, are treated differently in bankruptcy. While you can wipe out the debt itself, there’s a catch. Bankruptcy eliminates your personal liability for a secured debt, but it doesn’t eliminate the lender’s “lien” on the property. In other words, you can erase the debt, but you’ll lose the car or home in the process. If you want to keep the property, you’ll need to stay current on payments and, in some cases, “reaffirm” the debt. Bankruptcy offers a fresh start, but it’s not a free ride.

Clear Tax Debts

Bankruptcy can eliminate some tax debts, but the rules are complex. In general, income tax debts can only be discharged if they meet certain criteria: – The taxes are at least 3 years old – You filed the relevant tax returns on time – You didn’t commit fraud or willful evasion Even then, bankruptcy won’t touch tax liens or wipe out certain types of taxes, like payroll taxes or property taxes. If you’re drowning in tax debt, bankruptcy might provide some relief – but it’s no substitute for working out a payment plan with the IRS.

Understanding the Different Types of Personal Bankruptcy

Not all bankruptcies are created equal. The two main types of personal bankruptcy – Chapter 7 and Chapter 13 – work very differently.

Chapter 7 Bankruptcy

Known as “liquidation” bankruptcy, Chapter 7 is designed to wipe out most of your unsecured debts in a matter of months. It works like this: – You sell off your non-exempt assets (things like investment properties, valuable collections, etc.) – The proceeds are used to pay off as much of your debt as possible – The remaining eligible debts are discharged It’s a relatively quick process, but there’s a catch: you could lose property. And not everyone qualifies – if your income is too high, you might not be eligible.

Chapter 13 Bankruptcy

If Chapter 7 is a sprint, Chapter 13 is a marathon. Instead of wiping out debts right away, you enter into a 3-5 year repayment plan. Some key features of Chapter 13: – You keep all of your property – You make monthly payments to a trustee, who distributes the money to your creditors – Some debts (like mortgage arrears) can be paid off through the plan – Any remaining eligible debts are discharged at the end of the plan It takes longer and requires more discipline, but it’s a good option if you’re trying to save your home from foreclosure or if you make too much for Chapter 7.

Means Test for Chapter 7 Eligibility

Not everyone can file for Chapter 7 bankruptcy. To qualify, you need to pass the “means test.” The means test looks at your income, expenses, and family size to determine if you have enough disposable income to repay your debts. If you fail the test, you may still be able to file for Chapter 13. It’s a complex calculation with a lot of moving parts. But the bottom line is this: if you make too much money relative to your debts, Chapter 7 might be off the table.

The Bankruptcy Process: Steps Involved in Filing

Filing for bankruptcy isn’t as simple as filling out a few forms. It’s a complex legal process with a lot of moving parts. The first step is finding a qualified bankruptcy attorney. While you can file on your own, I wouldn’t recommend it. Bankruptcy laws are complex, and one misstep could cost you dearly. A good attorney will help you navigate the process, protect your assets, and ensure you’re getting the maximum benefit from bankruptcy.

Attending Credit Counseling

Before you can file, you’ll need to complete a credit counseling course from an approved provider. This course will help you assess your financial situation and explore alternatives to bankruptcy. It’s a mandatory step, but it can also be a valuable one. You might discover options you hadn’t considered or get tips on budgeting and rebuilding your credit. One of the most important parts of the bankruptcy process is listing all of your debts. This includes everything from credit card balances to medical bills to personal loans. Be thorough and honest. Failing to disclose a debt could result in that debt surviving bankruptcy – meaning you’ll still be on the hook for it.

Discharging Your Debts

The ultimate goal of bankruptcy is to have your debts discharged – meaning they’re legally forgiven and you’re no longer obligated to pay them. But not all debts can be discharged. Things like student loans, child support, and most tax debts will typically survive bankruptcy. And for the debts that are discharged, it’s not automatic. You’ll need to complete all the necessary steps, including the financial management course required for a discharge. Miss a step, and your debts could come back to haunt you.

Life After Bankruptcy: Rebuilding Your Credit

Bankruptcy isn’t the end of your financial story – it’s the beginning of a new chapter. But to make the most of your fresh start, you need to be proactive about rebuilding your credit. The first step is getting a handle on your credit situation. That means checking your credit reports from all three major bureaus – Experian, Equifax, and TransUnion. Look for errors or inaccuracies that could be dragging down your score. Dispute any incorrect information and make sure your bankruptcy is being reported correctly.

Establishing New Credit

It may seem counterintuitive, but one of the best ways to rebuild your credit after bankruptcy is to start using credit again. Of course, you’ll need to be cautious and strategic. Look for secured credit cards or credit-builder loans that are designed for people with damaged credit. Use them sparingly and pay them off in full each month. Over time, responsible credit use will help you build a positive payment history and improve your credit scores.

Budgeting and Financial Management

Finally, make sure you’re staying on top of your finances post-bankruptcy. Create a budget, track your spending, and avoid falling back into old habits. Consider working with a financial advisor or taking a money management course. The more you educate yourself about personal finance, the better equipped you’ll be to make smart decisions with your money. Remember, bankruptcy is a powerful tool – but it’s not a cure-all. It’s up to you to make the most of your fresh start and build a brighter financial future.

Conclusion

So, what have we learned about what bankruptcy can and can’t do? It can stop those harassing calls from creditors and give you a fresh start by wiping out a lot of your unsecured debts. But it can’t make your student loans, alimony, or taxes disappear.

Bankruptcy isn’t a decision to take lightly, but for some, it’s the best path forward. It’s a chance to hit the reset button and start rebuilding your credit and your life.

The key is to go in with your eyes wide open, knowing what bankruptcy can and can’t do. Armed with that knowledge, you can make the choice that’s right for you and your family. And remember, no matter what, there’s always hope for a brighter financial future.

To schedule a free consultation regarding a potential bankruptcy case, contact The Law Office of William Waldner today.