It’s not uncommon for an individual to experience some form of financial hardship throughout their life. From losing one’s job to dealing with an expensive medical emergency, there are many reasons why someone would fall behind on bills and require assistance handling debts.

Bankruptcy is the legal term used when an individual or legal entity (such as a corporation) cannot pay back their debts to creditors. Individuals or entities in this situation file for bankruptcy to obtain some form of relief from their outstanding debts.

The bankruptcy process generally involves:

  • A debtor. The person who is unable to pay their debts and is filing for bankruptcy. The debtor owes money to individuals or entities known as creditors.
  • A trustee. The person who gathers and sells the debtor’s nonexempted property (property that is deemed acceptable to sell, which often doesn’t include a person’s principal residence) and repays the creditors.

In most situations, the debtor will have an attorney who is involved in the bankruptcy process and works with bankruptcy judges (judges who work in a specialized court specific to bankruptcy cases) on the debtor’s behalf.

Types of Bankruptcy

The process for filing for bankruptcy is complex and can be confusing. It involves multiple steps, typically beginning with choosing the type of bankruptcy you wish to file for. There are two types of bankruptcy:

  • Chapter 7 Bankruptcy. This is the most common form of bankruptcy and it typically involves a trustee collecting and selling the debtor’s nonexempted property and distributing that money to creditors.
  • Chapter 13 Bankruptcy. This type of bankruptcy is a lot more complex and often involves filing a repayment plan. Repayment can last approximately three to five years after bankruptcy is filed.

Individuals may find it helpful to outline their various assets and debts using a Personal Financial Statement and to use this information to help determine which type of bankruptcy is best.

Debts in a Bankruptcy

Bankruptcy will help relieve you of a variety of debts, such as:

  • Outstanding medical expenses. In fact, this is the most common reason for bankruptcy in the United States.
  • Overdue credit card bills.
  • Utility bills or bills that were sent to a collection agency.
  • Some unpaid taxes. Often, individuals are able to discharge tax-related debts from a few years prior to filing of bankruptcy (but may be out of luck for recent tax debts).
  • Personal loans.

Keep in mind, you may still be required to make some type of repayment to your creditors, regardless of filing for bankruptcy.

Moreover, although filing for bankruptcy can eliminate many of your debts, it is important to know that it won’t remove all debts.

For instance, some debts that won’t be discharged after filing for bankruptcy include:

  • Student loans. Generally speaking, your obligation to pay your student loans will not disappear when you file for bankruptcy.
  • Child support. The purpose of child support is for one parent to help the other care for their child, and thus it is usually not eligible for removal when filing for bankruptcy.
  • Alimony. Alimony, sometimes called spousal support, assists a person who has gone through a separation or divorce and cannot support themselves properly, so, like child support, individuals are obligated to make this payment regardless of their financial difficulties.
  • New credit card debts. You can’t run amok with a new credit card, rack up more debt, and expect it to be discharged while you are in the process of filing for bankruptcy. Go figure.

In rare cases, individuals can go to court and prove that repaying one of these debts will cause them to suffer undue hardship (i.e. when a specific action, like repaying a debt, is significantly difficult) and obtain a discharge. However, doing so is not simple or easy and typically shouldn’t be done without the assistance of a lawyer.

After Filing for Bankruptcy

Although it can assist you with handling overwhelming payments to creditors, bankruptcy doesn’t completely absolve you of money you owe, and it should be a last resort to handing unbearable outstanding debts.

Following bankruptcy, individuals or entities may be unable to obtain new credit (such as a credit card, car loan, or mortgage) for some time, so be sure to weigh the advantages and disadvantages of filing for bankruptcy and ensure it is the best course of action for your situation.

Posted by Ashley Camarneiro

Ashley is an experienced researcher and writer with an interest in real estate, contract, and family law. Before starting at LawDepot in the summer of 2017, Ashley worked as a legal assistant in the corporate and family law sector.