Bankruptcy: What It Can and Cannot Do

Bankruptcy law book with glasses on table.

The Scope of Bankruptcy

Bankruptcy law offers important debt relief for debtors, but not all debts can be eliminated by bankruptcy

Filing for bankruptcy can be a powerful remedy to resolve serious debt issues. Bankruptcy stops most collection actions, including wage garnishments, most lawsuits, and annoying debt collection phone calls. Once discharged, it eliminates many types of consumer debt such as credit cards, medical bills, personal loans and more.

Unfortunately, bankruptcy doesn’t stop all creditors nor does it eliminate all debt obligations. You still may have to repay arrearages on many tax debts; arrearages for alimony or child support; and student loans. Learn more about what bankruptcy can and cannot do to your debt burden.

What Can Bankruptcy Do?

People who are struggling with a huge debt burden can eliminate certain obligations and get a fresh start. The most common types of bankruptcy filings, Chapter 7 and Chapter 13, offer differing benefits and, in some cases, treat property and debt differently. When considering which type of bankruptcy filing works best in your case, you’ll select the chapter that’s right for your situation based on your goals, your income and your property.

Following are some things that bankruptcy can accomplish:

Immediately Stop Harassment by Creditors and Other Collection Activities

The automatic stay is a court order that takes effect immediately upon filing a bankruptcy case. Most creditor calls, wage garnishments and lawsuits are stopped. Certain types of activities are not eliminated or halted, such as domestic support payments and criminal cases.

Stop a Foreclosure, Eviction, or Repossession

As long as the following actions are pending, they automatically stay will bring them to an immediate halt:

Eviction: Any eviction that is currently in the litigation process will temporarily stop with the automatic stay unless, in many cases, your landlord already has received an eviction judgment against you.

Foreclosure: If you’re behind on your mortgage payments, the automatic stay will stop a foreclosure. Filing for Chapter 7 won’t allow you to keep the property. If you can’t bring the account current, you’ll lose the house once the stay has been lifted. Chapter 13, however, allows you to catch up on arrearages so you can keep the home.

Repossession: As in the case of a mortgage, the automatic stay will also bring any collection or repossession activity to an immediate halt. If you’re behind on the payments, you’ll still have to bring them current to keep the vehicle in a Chapter 7. You can include a vehicle arrearage in a Chapter 13 filing to bring the payments current, however.

Eliminate Credit Card Debt and Most Additional “Nonpriority” Unsecured Debts

Bankruptcy is a great way to eliminate credit card debt, medical bills, personal loans, gym contracts, overdue utility bills, and other unsecured debt. This type of debt is referred to as “unsecured” because your promise to pay does not include collateral. Filing for bankruptcy can wipe out most non-priority unsecured debts, except for student loans.

The speed that your debt will get eliminated depends on which type of bankruptcy you file:

Chapter 7 Bankruptcy: A Chapter 7 bankruptcy case typically takes about four months from filing to discharge, barring complications.

Chapter 13 Bankruptcy: This type of bankruptcy filing requires the debtor to repay a portion of secured debt as part of a three- to five-year repayment plan. Any unsecured debt remaining after the repayment plan is complete will be discharged.

The Benefits of Chapter 13 Bankruptcy

What Can Chapter 13 Bankruptcy Do?

Each of the chapters of bankruptcy offers unique resolutions to debt challenges. Chapter 7 is intended primarily for lower-income filters, and won’t help you keep secured property if you are far behind on payments. If you do have enough income to pay something to creditors, you may want to take advantage of the benefits included with a Chapter 13 bankruptcy filing.

Chapter 13 can accomplish the following:

Halt a Foreclosure on Your Home Mortgage: Chapter 13 filing immediately stops foreclosure action with the “automatic stay.” It will also force the lender to accept payments through the Chapter 13 payment plan to catch up the arrearage over time. To make this type of payment plan work, you must prove to the trustee that you have enough income to handle the payments of a repayment plan.

Keep Property That Isn’t Exempt: It’s rare for a debtor to give up everything they own when filing bankruptcy. Certain exempt items that you need to work and live, such as some equity in your home, clothing, furniture, a car of a certain value (if payments are current) are automatically protected. A debtor who files Chapter 7 may have to surrender non-exempt property to satisfy creditors, but in a Chapter 13 filing that is not necessarily the case. That doesn’t mean you’re allowed to keep your assets with no strings attached; you’ll have to pay the value of any non-exempt property to the creditors in your repayment plan.

What Bankruptcy Cannot Do?

Unfortunately, bankruptcy isn’t a cure-all for all debt issues. Here are some things that it can’t do for you.

Prevent Foreclosure or Repossession:
Prevent foreclosure or repossession of property you can’t pay for or afford to get caught up. Getting a bankruptcy discharge eliminates many debts, but does not eliminate some liens. A secured debt, such as a car loan or mortgage loan on your home, can be eliminated by bankruptcy but the mortgage or vehicle lien that is attached to the property. The creditor is still allowed to recover the collateral. If you file Chapter 7, for example, the mortgage may get eliminated, but the lien from the lender will still remain in place. If the mortgage remains unpaid, the lender can foreclose on the property after the automatic stay is lifted.

Eliminate Alimony and Child Support Obligations:
Domestic support obligations survive bankruptcy. You’ll still owe these debts, as if you never filed for bankruptcy. If you file a Chapter 13 bankruptcy, you’ll have to repay the arrearage through the repayment plan.

Eliminate Student Loan Debt:
You typically cannot eliminate student loan debt through bankruptcy, unless you can demonstrate that repayment of the loan would cause “undue hardship,” a very high standard to reach. You have to demonstrate that you can’t currently afford to pay your loan and have very little chance you can repay in the future.

Eliminate Tax Debt:
Most unpaid taxes are difficult or impossible to eliminate with bankruptcy, but it is sometimes possible to get some older unpaid tax debts unpaid.

Eliminate Other Non-Dischargeable Debt: These types of debt are among the other debts that are not dischargeable under either Chapter 7 or Chapter 13.

  • Debt for personal injury or death caused by driving while intoxicated.
  • Fines and penalties imposed as punishment, like traffic tickets or restitution as part of a criminal case.
  • Debt as the result of a fraud will not be discharged, if the creditor files a lawsuit to convince the judge that the debt should survive the bankruptcy discharge.

Facing Financial Hurdles Alone?

Understanding the specific protections and limitations of bankruptcy is crucial for your peace of mind. We're here to clarify your options.

Receive Expert Guidance