Filing for bankruptcy doesn’t stop the world from turning. You still have your job, your family, and the rest of your life to think about. Bankruptcy may also not take care of all of your financial worries. Some debts extend past bankruptcy. You should make the decision to file for bankruptcy with the long game in mind. To that end, you need to know how bankruptcy works.
Filing for Bankruptcy
Filing for bankruptcy protection will wipe out a lot of your debts. Specifically, bankruptcy takes care of unsecured debts. Unsecured debts are debts not linked to a specific piece of property. Credit card debt and medical debt, for example, are unsecured. At the end of the bankruptcy process, your remaining unsecured debts are discharged, which means they are legally forgiven. You don’t owe anything toward those debts and those creditors cannot attempt to collect anything from you.
Secured debts are linked to property as security. Your home, for example, secures your mortgage loan. Your car secures your auto loan. These debts are not discharged in bankruptcy.
Types of Bankruptcy
Consumers generally file under one of two main types of bankruptcy: Chapter 7 and Chapter 13. Both types come with the protection of the automatic stay. The automatic stay prevents collection actions, repossessions, and foreclosures for the duration of the bankruptcy process. 11 U.S.C.A. § 362(c)(1). The automatic stay is one of the most important aspects of bankruptcy. It gives consumers the time and breathing room they need to organize their finances and ensures that all of a consumer’s debts are dealt with through the bankruptcy court.
Under Chapter 7, you’ll surrender your nonexempt property to the bankruptcy trustee. The trustee will sell this nonexempt property and pay the proceeds to your creditors. Most debtors have little or no nonexempt property, so creditors often receive very little. The New Jersey state exemptions are very limited, but New Jersey filers can use the more extensive federal exemptions to protect their property. Once the trustee completes the sale process, your remaining unsecured debts are forgiven.
Under Chapter 13, you’ll create a payment plan under court supervision. This plan lasts three to five years. The amount of your payments is based on what you are capable of paying, not on what you owe. At the end of the plan, your remaining unsecured debt is discharged.
We know what happens to your unsecured debts in bankruptcy. Whatever doesn’t get paid back during the bankruptcy process is forgiven. What happens to your secured debts?
The answer depends on the type of bankruptcy you choose. Under Chapter 13, you’ll generally continue to make your payments on your secured debts. Under Chapter 7, you can choose to either allow the creditor to repossess the security or to reaffirm your debt. If you reaffirm the debt, you will be required to continue making your regular payments. Reaffirmed debt won’t be dischargeable in bankruptcy in the future, so you’re stuck with it forever. If the creditor repossesses the property securing the debt, you may have to pay a deficiency (the difference between the value of the property and what you owe), but you won’t have to worry about the debt after bankruptcy.
If you’ve continued to make your ordinary payments through a Chapter 13 plan, you won’t have to worry about creditors coming after you for collection when your bankruptcy is over. You won’t be in arrears and you’ll simply continue to make your regular payments after bankruptcy.
In Chapter 7, however, you’ll have to worry about your secured debts after bankruptcy. The automatic stay, which protects you from collection actions during the bankruptcy process, expires when your bankruptcy ends. That means that your secured creditors can sue you for collection after your bankruptcy. You were probably already behind on payments by the time you filed for bankruptcy and that arrearage only grows as time goes on. Chapter 7 bankruptcy doesn’t offer any help with your secured creditors after the bankruptcy process ends, so remember that you’ll still have to deal with your secured debts after bankruptcy.
In addition to secured debts, certain other debts are not dischargeable in bankruptcy. For example, student loans are not dischargeable. Taxes, child and spousal support, debts not listed on your schedules when you file, debts incurred by fraud, and reaffirmed debts are also not dischargeable. That means your creditors will be waiting for you at the end of your bankruptcy process. They still have the legal right to collect and they will take it. It’s in their interest to move immediately after the end of your bankruptcy because you’re free of unsecured debt. That means you have more cash to pay the creditors holding nondischargeable and secured debts.
Denial of Discharge
Filing for bankruptcy isn’t a guarantee. You have to follow through with the process in good faith. Otherwise, the court may deny your discharge. It could happen because you lied to the court about your income, expenses, debts, assets, and other aspects of your financial life. It could happen because you fail to make your Chapter 13 plan payments. If your discharge is denied, the entire bankruptcy process is wasted. The automatic stay ends when your discharge is denied, so your creditors can once again sue you for collection. You not only have to face the creditors holding your secured and nondischargeable debt, you also have to face the creditors holding your unsecured debt, which was never discharged.
Bankruptcy is an excellent tool for wiping the slate clean of unsecured debts. If you’re struggling with credit card debt, medical debt, personal loans, and other types of unsecured debt, bankruptcy may be just what you need to get a fresh financial start. On the other hand, bankruptcy offers very limited help to consumers with a heavy load of secured and nondischargeable debt. If most of your debts are secured or nondischargeable, bankruptcy may not be the best option for you.
If you’re struggling with debt, reach out to an experienced bankruptcy attorney. Bring all of your financial documents and explain your situation. Your attorney will help determine the best option for you given your goals and circumstances.