Bankruptcy Secrets

by Beverly Bird

When you're drowning in debt, bankruptcy may seem like an attractive option. An automatic stay goes into effect as soon as you file and by law, your creditors must stop chasing and harassing you for payment. But as with all legal issues, there are pros and cons and some may not become apparent until after you file.

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Chapter 7 Vs. Chapter 13

Most individual debtors file either a Chapter 7 or Chapter 13 bankruptcy. Chapter 7 involves a bankruptcy trustee liquidating or selling any property you can't protect with exemptions – certain assets the law allows you to keep – and using the proceeds to pay off your creditors. The bankruptcy court discharges any balances that remain and you no longer owe those bills. Chapter 13 involves funding a repayment plan with your disposable income to satisfy your creditors, either in whole or in part. If you still owe any creditors at the end of your repayment plan, your bankruptcy discharges these debts.

Bankruptcy Can Be Expensive

Unfortunately, it can cost quite a bit to file for either bankruptcy type. Although no law exists that says you must hire an attorney, you might feel more comfortable doing so because bankruptcy can be a complicated legal matter. Even if you decide to handle your bankruptcy yourself and use an online document provider, the forms aren't free. You'll also have court filing costs. However, the bankruptcy court sometimes works out installment arrangements for filing fees, and if you earn less than 150 percent of the national poverty level, you may be exempt from paying these fees entirely.

Utility Companies Can Require Deposits

You're legally obligated to list all your debts in your bankruptcy petition, whether you file for Chapter 7 or Chapter 13. If your utility accounts are current, you don't have to include them because they're expenses, not debts. If any accounts are delinquent, however, you must list them. This means your utility companies will receive notice of your bankruptcy filing. They can’t turn your utilities off, because that would violate your automatic stay, but if you placed a deposit with them when you began service, they can legally use it to pay all or part of your past due balance. The bankruptcy code also allows them to charge a deposit for service going forward. If you don't pay the deposit, they can legally shut off service.

Not All Debts Are Discharged

The federal bankruptcy code lists certain types of debts that are not dischargeable, so you'll still owe these after your bankruptcy is over and other debts have gone away. Chapter 7 includes more non-dischargeable debts than Chapter 13, but you can usually anticipate not being able to eliminate debts associated with student loans, family support obligations, some taxes, and court-ordered restitution or penalties resulting from criminal proceedings or civil lawsuits. When you receive your official discharge from the bankruptcy court, you might not even be sure which debts went away and which you still owe because the notice doesn't detail them.

Your Debts Going Forward

Bankruptcy only eliminates debts you list in your petition; those you owe at the time you file. If you incur new debts the next day, the automatic stay does not affect these and you still owe them. Credit card companies and auto lenders know this, so you could find yourself bombarded with lending offers after your bankruptcy is final. Accepting these offers may seem like a good way to begin rebuilding your credit, but beware. They'll probably come with very high interest rates and some hidden fees because your bankruptcy indicates you may not be a good credit risk.