Bankruptcy is a legal process people use to get rid of (discharge) or repay (reorganize) their debt. Congress recently passed a law that will make it more difficult for some people to file bankruptcy, but that doesn’t mean it’s impossible.
No one should “sell” you on bankruptcy. You should always seek professional advice from an attorney to understand the law in relation to your specific situation. Only after you have a full understanding should you decide if bankruptcy is the right financial choice for you.
With a liquidation bankruptcy (generally known as “Chapter 7”), an individual can usually get most or all of their debt eliminated, allowing for a “fresh start.” In some cases, however, a court appointed trustee may sell some of your possessions to pay off creditors.
With other types of bankruptcy (such as “Chapter 11,” “12,” or “13”), you create a plan for paying back your debts. If the court agrees, your plan may include paying some, part, or none of the debt to any specific creditor. Most consumers opt to file Chapter 7 or 13. Family farmers can use Chapter 12.
Not All Debts Go Away, Even if You File Bankruptcy
Some types of debt cannot be discharged:
- Child support and alimony
- Student loans
- Criminal or civil fines or penalties
- Debts you did not report when you filed for bankruptcy
Some Property Is Exempt from Bankruptcy
That means you can usually keep it even after you’ve filed for bankruptcy. State laws about exemptions are different from federal laws. In Pennsylvania, you can choose which you think is better for you. The Pennsylvania Bar Association says in most cases, federal exemptions are preferable to the exemptions described by Pennsylvania law.
Examples of exemptions:
- Home, car (depending on how much you owe on them)
- Money from public assistance
- Retirement plans
- Tools you use for your job
Consider the Consequences
A bankruptcy stays on your credit report for 10 years. Lenders, employers, and landlords may look at your credit history, and it may be hard to get a loan, a job, or a place to live.
In 2001, half of all people who filed for bankruptcy did so because they were unable to pay their medical bills. Surprisingly, most people who declared bankruptcy had health insurance.
In Pennsylvania, one in every 89 households filed for bankruptcy as of 2004; the state ranks 31st nationwide in bankruptcies per household. (Utah is first, one in 36 households; Alaska is last one in 171).
Other Web Resources
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Get the Facts
FindLaw.com provides the basics of bankruptcy. Learn more...
Do Your Homework
The Federal Trade Commission has published Knee Deep in Debt, which considers several options, including bankruptcy. Learn more...
Before You File
The Federal Trade Commission has published a guide for people considering bankruptcy. Learn more...
What Really Happens?
Check out MSN Money Central’s 12 Myths about Bankruptcy.
Who Files and Why?
A MetLife booklet, Life Advice, explains some of the reasons people file for bankruptcy and how the process works. Learn more...