Bankruptcy Facts

While bankruptcy may be a life vest for most people drowning in debt, choosing to file is never an easy decision. For some financially distressed debtors, bankruptcy may not always be the best option.

Several events can cause individuals to lose control of their financial situation. Divorce, job loss, lawsuits, foreclosures or credit card debt can drive a person over the financial edge. Generally, filing bankruptcy allows people who are having financial difficulties to wipe out their debts. In most cases, people filing bankruptcy can keep all of their property. Thus, bankruptcy helps people wipe out their debts, keep their property and get a fresh start.

Many people filing for bankruptcy have accumulated a huge credit card debt and in some cases are trying to prevent a foreclosure on their home.

Ten Years of Bad Credit

Although bankruptcy can wipe out all unsecured debts through an order of the court called a discharge, bankruptcy information remains on a credit report for 10 years. Any negative information that appears on a credit report may prevent an individual from buying a home or car, or from obtaining a credit card or loan.

Bankruptcy serves two main purposes:

1. It gives creditors a fair share of the money that the debtors can afford to pay back.

2. It gives debtors a fresh start.

There are two ways in which bankruptcy can provide for payments to creditors and a discharge for debtors – Chapter 7 and Chapter 13.

Chapter 7

In a Chapter 7 bankruptcy, known as the liquidation chapter, debtors give up certain property when they file for bankruptcy. A trustee appointed by the court sells the property and uses the proceeds to pay the creditors. A trustee is usually a lawyer or accountant who specializes in bankruptcy cases. The debtor receives a discharge shortly after the case is filed.Debtors are allowed to keep any money earned after filing for bankruptcy, as well as most other property obtained after the filing. Under this chapter, all unsecured debts are wiped out. These debts include credit card bills, medical and legal fees, utility bills, deficiency balances (the difference between the amount owed and the value of the property), loans from friends and some student loans.

There are some debts that cannot be discharged through the bankruptcy process. These debts, known as non-dischargeable debts, include alimony, child support, some student loans, certain federal, state and local taxes, debts from fraud, larceny, theft, and fines and penalties for items worth over $1,000.

Chapter 13

Chapter 13 is designed for individuals with regular income who want to pay their debts but are currently unable to do so. The purpose of this chapter is to help individuals, under court supervision and protection, to propose and carry out a repayment plan under which creditors are paid over an extended period of time. Under this chapter, debtors are permitted to repay creditors in full or in part, in installments over a three-year period.

Try the following measures before declaring bankruptcy:

• Control spending, either with the help of a credit counselor or a debt consolidation plan.

• Set up repayment plans with creditors.

• Get credit counseling and learn about financial management.

Most experts advise against filing for bankruptcy and recommend finding alternative ways to pay off debt. Most consumers should try paying off their debts through a repayment plan before choosing bankruptcy. These types of programs will teach the consumer ways to reduce expenses and save money.

DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.  Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email