Two chapters
Individuals use one of two kinds of federal bankruptcy. Chapter 7 cancels most unsecured debt, such as credit cards, medical bills and personal loans, in about four to six months. A trustee may sell property that is not protected, but exemptions cover basics such as household goods, a modest car and some home equity, and most filers give up nothing. You qualify through a means test that compares your income with your state's median.
Chapter 13 is a court-supervised repayment plan lasting three to five years. You keep your property, pay what your budget allows, and whatever unsecured debt remains at the end is discharged. People choose it when they earn too much for Chapter 7 or need time to catch up on a mortgage.
What filing does and does not do
The moment a case is filed, an automatic stay halts collection calls, lawsuits, wage garnishments and foreclosure sales. Some debts survive all the same. Child support, alimony, most recent tax debt, criminal fines and debts for injuries caused by drunk driving are not discharged. Student loans can be discharged only through a separate hardship proceeding that is difficult to win. A lien also survives, so a car loan or mortgage has to be kept current if you want to keep the car or the house.
The process and the price
You complete a credit counseling course from an approved agency within 180 days before filing. You then file a petition listing every asset, debt and recent transfer under penalty of perjury. About a month later you attend the meeting of creditors, where the trustee questions you under oath for roughly ten minutes and creditors rarely appear. A second course in financial management is required before discharge.
The court filing fee is a few hundred dollars. Lawyers commonly charge a flat $1,000 to $2,000 for Chapter 7 and more for Chapter 13. The paperwork is unforgiving, so do not attempt it alone.
Mistakes before filing
Repaying a relative shortly before filing is one, since the trustee can recover payments made to insiders within the past year. Transferring a car or a house into someone else's name can be treated as fraud. Charging luxuries in the 90 days before filing invites a challenge to those debts. Omitting a creditor or an asset can cost you the discharge.
Note A Chapter 7 case stays on your credit report for ten years and a Chapter 13 case for seven. Scores often start to recover within a year or two, because the debt itself is gone.
