Understanding Bankruptcy

Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start.  The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court.  In most cases, filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to law.

Table of Contents

  1. Bankruptcy Basics
  2. What bankruptcy can't do
  3. Types of Bankruptcy Cases
  4. Bankruptcy Basics
  5. Bankruptcy Basics - Chapter 7
  6. Bankruptcy Basics - Chapter 13
  7. Bankruptcy Basics - The Process
  8. Facts About Bankruptcy
  9. Personal Bankruptcy Basics in Maryland
  10. Will bankruptcy wipe out all my debts?
  11. Should I file for bankruptcy?
  12. Could bankruptcy help me prevent my car from being repossesed?

Bankruptcy Basics

This pamphlet provides basic information to debtors, creditors, court personnel, the media, and the general public on different aspects of the federal bankruptcy laws.  
Contributed by: Administrative Office of the U. S. Courts
Last Reviewed: 07/22/2019

What bankruptcy can't do

Bankruptcy can’t cure every financial problem, nor is it the right step for everyone. 

In bankruptcy, it is usually not possible to:

  • Eliminate certain obligations to “secured” creditors.  A “secured” creditor is a creditor that can take something (called “collateral”) if the debt is not paid as agreed.  Common examples are car loans and home mortgages.  You can force secured creditors to take payments over time in the bankruptcy process, and bankruptcy can eliminate your obligation to pay more money if your property has been taken.  But, you generally cannot keep the collateral unless you keep making payments on the debt.
  • Discharge certain debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.
  • Protect co-signers on your debts.  If a relative or friend has co-signed a loan, and you discharge the loan in bankruptcy, the co-signer may still have to repay all or part of the loan.
  • Discharge debts that arise after bankruptcy has been filed.

Types of Bankruptcy Cases

There are four types of bankruptcy cases provided under the law:

  1. Chapter 7 is known as “straight” bankruptcy or “liquidation.”  It requires a debtor to give up property which exceeds certain limits called “exemptions,” so the property can be sold to pay creditors.
  2. Chapter 11, known as “reorganization,” is used by businesses and a few individual debtors whose debts are very large.
  3. Chapter 12 is reserved for family farmers.
  4. Chapter 13 is called “debt adjustment.”  It requires a debtor to file a plan to pay debts (or parts of debts) from current income.

Bankruptcy Basics

This pamphlet provides basic information to debtors, creditors, court personnel, the media, and the general public on different aspects of the federal bankruptcy laws.  
Contributed by: Administrative Office of the U. S. Courts
Last Reviewed: 07/22/2019

Bankruptcy Basics - Chapter 7

Fact Sheet explaining Chapter 7 Bankruptcy, also know as "liquidation."  
Contributed by: Administrative Office of the U. S. Courts
Last Reviewed: 07/22/2019

Bankruptcy Basics - Chapter 13

Fact sheet explaining Chapter 13 Bankruptcy. The purpose of Chapter 13 is to enable financially distressed debtors to propose and carry out a repayment plan under which creditors are paid over an extended period of time.  
Contributed by: Administrative Office of the U. S. Courts
Last Reviewed: 07/22/2019

Bankruptcy Basics - The Process

Bankruptcy Basics provides basic information to debtors, creditors, court personnel, the media, and the general public on different aspects of the federal bankruptcy laws. It also provides individuals who may be considering bankruptcy with a basic explanation of the different chapters under which a bankruptcy case may be filed and to answer some of the most commonly asked questions about the bankruptcy process. 
Contributed by: Administrative Office of the United States Courts
Last Reviewed: 07/22/2019

Facts About Bankruptcy

A decision to file for bankruptcy should only be made after determining that bankruptcy is the best way to deal with your financial problems. This web page will answer some of your questions regarding bankruptcy in Delaware. 
Contributed by: Legal Services Corporation of Delaware, Inc.
Last Reviewed: 07/22/2019

Click here for a pdf version of this document

Personal Bankruptcy Basics in Maryland

Questions and Answers from the People's Law Library of Maryland 
Contributed by: Maryland Legal Assistance Network
Last Reviewed: 04/05/2019

http://www.peoples-law.org/node/481

Will bankruptcy wipe out all my debts?

No. Bankruptcy will wipe out most debts, but it will NOT normally wipe out:

  • Money owed for child support or alimony, fines, and some taxes;
  • Debts not listed on your bankruptcy petition;
  • Loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
  • Debts resulting from “willful and malicious” harm (such as damages caused by drunk driving);
  • Most student loans;
  • Mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).

Should I file for bankruptcy?

There are many different reasons to file or not.  If you are unsure, you should speak to an attorney for advice.  It is important to remember that bankruptcy will not fix everyone’s money problems.

When you try to decide what to do, you should first make a monthly budget.  List, and add up, all of your regular monthly expenses for necessities.  Include expenses like:  rent/mortgage payments, utilities, food, gas or bus fare, clothing, and other regular monthly expenses that you expect to have even after bankruptcy.  If you have a car loan and you want to keep the car, include the car payments too.  Then add up the monthly income for everyone in the house who shares expenses.  Include your job, public benefit checks, food stamps, pensions, or disability payments.

If your income is a lot less than your expenses, then bankruptcy might not help.  Bankruptcy only wipes out old debts.  So if your budget shows that you will have trouble making ends meet after bankruptcy, or if you think you will still need to use credit cards or borrow money after filing, then you need to think about getting a second job or cutting expenses (for example, by getting a cheaper car or apartment).

Also look at how old your debts are.  Most consumer debts only stay on your credit report for seven years.  A bankruptcy will stay for ten years.  So, if your debts are a few years old, it might be better to just hang in there for a few more years until they are taken off your credit report and your creditors give up (or until you can pay them).

Could bankruptcy help me prevent my car from being repossesed?

You should contact an attorney to find out whether filing a bankruptcy petition would be the best way to deal with your financial problems. As soon as you file for bankruptcy, Bankruptcy law automatically stops any threatened repossession. However, the secured creditor can later ask the court to lift the automatic stay so that they can proceed with repossession. In some cases, bankruptcy may allow you to recover possession of a vehicle which has already been repossessed. Bankruptcy law also provides you with options to cure defaults and redeem the vehicle which are more favorable than under non-bankruptcy law. For example, in certain circumstances, bankruptcy allows you to redeem the vehicle by paying the fair market value (current value) of the vehicle rather than paying the total amount remaining on the loan.