What bankruptcy can and cannot do

Most people come to bankruptcy after months, or years, of collection calls and juggling bills. The question on their mind is simple: will this actually fix things? For many people the answer is yes. But bankruptcy is not a magic eraser, and it helps to know its limits before you file.

What a discharge is

The goal of most consumer bankruptcy cases is a discharge. A discharge is a court order that ends your legal duty to pay certain debts. After it is entered, those creditors can never try to collect from you again. They cannot call, send letters, sue you or garnish your wages for those debts (11 U.S.C. § 524).

Protection starts even sooner. The moment your case is filed, a court order called the automatic stay stops most collection, including lawsuits, wage garnishments, repossessions and foreclosure sales (11 U.S.C. § 362). If a garnishment or sale date is days away, an emergency bankruptcy filing may stop it.

Debts bankruptcy usually wipes out

Most everyday unsecured debts can be discharged. "Unsecured" means the debt is not tied to property the creditor can take back. Common examples:

• Credit card balances
• Medical and hospital bills
• Personal loans and payday loans
• Past-due utility bills
• Money still owed after a car is repossessed (a "deficiency balance")
• Most old court judgments for unpaid bills

Debts bankruptcy usually does not wipe out

Congress decided that some debts should survive bankruptcy (11 U.S.C. § 523(a)). The most common ones:

• Child support and spousal support. Past-due support stays owed, and so does future support. In Chapter 7, other debts owed to a former spouse under a divorce judgment, such as a property equalization payment, also usually survive.
• Most student loans. They can be discharged only if you prove that repaying them would be an "undue hardship," which takes a separate court case. That is hard, but not impossible.
• Recent taxes. Income taxes can sometimes be discharged if they are old enough, the returns were filed on time and other timing rules are met. Recent income taxes, payroll taxes held back from employees, and taxes for years you never filed a return usually stay.
• Debts from fraud. If a creditor proves you got money by lying, or ran up charges with no plan to pay, the court can rule that debt survives.
• Debts for injuring someone on purpose and most fines, penalties and court-ordered restitution owed to the government.

Some of these exceptions are automatic. Others, like fraud, apply only if the creditor files a lawsuit inside your bankruptcy case before a deadline. If the creditor misses that deadline, the debt is usually discharged.

What happens to cosigners

Your discharge protects you, not the people who signed with you. If your mother cosigned your car loan, or a friend cosigned a personal loan, the lender can still go after them once your case is filed.

Chapter 13 can help here. In a Chapter 13 case, a special stay usually protects cosigners on consumer debts while your repayment plan is active, as long as the plan pays that debt (11 U.S.C. § 1301). If protecting a cosigner matters to you, tell us early. It can change which chapter makes sense. Learn more on our Chapter 13 page.

Liens and secured debts: the part that surprises people

A lien is a creditor's legal claim against a specific piece of property, like a mortgage on your house or a lender's claim on your car. A discharge wipes out your personal duty to pay. It does not, by itself, remove the lien. So if you keep the property, you generally have to keep paying, or the creditor can take it back.

Car loans

If you want to keep a financed car in Chapter 7, you usually have three choices:

• Reaffirm the loan. You sign a new agreement to keep paying, and the debt survives the bankruptcy. The court may review it to make sure you can afford it.
• Redeem the car by paying the lender what the car is worth today, in one lump sum.
• Surrender the car. You give it back, and any balance left after the sale is discharged.

In Chapter 13, you may be able to catch up missed car payments over time. In some cases, you may be able to lower the balance on an older car loan to the car's value.

Judgment liens on your home

If a creditor won a court judgment and recorded it against your house, bankruptcy may let you remove, or "avoid," that lien if it eats into your homestead exemption (11 U.S.C. § 522(f)). This does not work for mortgages or tax liens. See our page on bankruptcy exemptions for how the homestead protects your home.

What bankruptcy cannot do

• It cannot stop debts you take on after you file.
• It cannot erase a mortgage or car lien while you keep the property and stop paying.
• It cannot undo a divorce judgment's support orders.
• It cannot protect property that is not covered by an exemption, though California's exemptions protect most people's household goods, retirement accounts and a car up to a limit.

Find out what bankruptcy can do for you

Every case is different, and the right answer depends on your debts, your income and what you own. Bankruptcy consultations at our Whittier office are free. Steven will review your situation and tell you plainly what bankruptcy can and cannot do for you. Call (562) 612-7806 any time, or request a consultation. You can also read our bankruptcy FAQs or learn more about our bankruptcy practice.

• Sources: 11 U.S.C. § 362 (automatic stay)
• 11 U.S.C. § 523 (exceptions to discharge)
• 11 U.S.C. § 524 (effect of discharge)
• 11 U.S.C. § 522 (exemptions and lien avoidance)
• 11 U.S.C. § 1301 (Chapter 13 codebtor stay)

This article is general information, not legal advice. Every case is different, and past results do not guarantee a similar outcome.