A guide to bankruptcy

Bankruptcy is a process in federal court that helps people who owe money get relief from debts they cannot pay.

This guide can help you:

  • Understand the basics of bankruptcy
  • Find resources to help you take the next step

What is bankruptcy?

Bankruptcy is a legal process to help people who owe money, or debtors, get relief from debts they cannot pay and, at the same time, help people who are owed money, or creditors, get paid from assets property the debtor has.

After a bankruptcy, the debtor is no longer legally required to pay any debts that are eliminated, or discharged, in bankruptcy court.

Collectors cannot collect on the debts that have been discharged. This means that creditors have to stop all legal action, telephone calls, letters, and other types of contact about debts that have been discharged by the bankruptcy court.

Bankruptcy cases happen in federal court

Bankruptcy is governed by federal law, not California law. This guide provides basic information and resources, but there are no specific California state forms and you don't file with your county court, as you might for other legal matters. 

Federal bankruptcy forms

Decide if bankruptcy is an option for you

Since there are different types of bankruptcy, one may be better for you than another, or bankruptcy may not be a good solution for your type of problem at all.

To decide if you should file for bankruptcy, you need to know:

  • What alternatives you have besides bankruptcy
  • Which debts will be eliminated, or discharged, in bankruptcy and which will not
  • What type of bankruptcy is the best option for you

Alternatives to bankruptcy

  • Try to figure out if you can avoid bankruptcy on your own

    Determine if you can reduce your expenses, increase your income, negotiate lower interest rates, or sell some property. You may be able to make adjustments to your situation to start paying off your debts on your own.

  • Learn about other options from a bankruptcy lawyer

    A lawyer with expertise in bankruptcy may be able to give you additional ideas for alternatives.

  • Get help from a credit counseling agency

    They can help you make a budget, negotiate a repayment plan with a reduced or even zero interest rate, and help you stop aggressive collection practices that are overwhelming you.

Be careful about getting help from companies promising debt settlements. 

Many companies promising debt settlement for very little money take advantage of debtors by charging upfront whether or not they actually settle the debt.

Types of debt that is not eliminated by bankruptcy

You cannot discharge all debts in bankruptcy. Some of the most common debts that you cannot get rid of in bankruptcy are:

  • Debts from child support or spousal support
  • Most student loans
  • Most tax debts
  • Wages you owe people who worked for you
  • Damages for personal injury you caused when driving while intoxicated
  • Debts to government agencies for fines or penalties

Types of bankruptcy

There are four common kinds of bankruptcy cases, named by the chapter of the federal Bankruptcy Code that describes them.

  • Chapter 7 is the most common form of bankruptcy for individuals. The court sells all your assets (except assets that are exempt) for cash and then pays your creditors. You must make less than a certain amount of money to qualify.
  • Chapter 11 bankruptcy is usually for corporations because of its complexity, but individuals can file too. The debtor usually keeps their assets and continues to operate the business while working on a plan to pay off the creditors.
  • Chapter 12 is a simplified reorganization for family farmers, where the debtor keeps his or her property and works out a repayment plan with the creditors.
  • Chapter 13 is like Chapter 11 but for individuals. It is a repayment plan for individuals with regular income. Under this type of bankruptcy, you pay your debts off over a 3- to 5-year period and you keep your property.

Get help with bankruptcy

Deciding to file for bankruptcy is a big decision. It can affect you for a long time and it does not remove all types of debt. Any mistake in your case may mean the court can dismiss your case.

Since bankruptcy is a specialized area of law that is very complex, it is a good idea to get advice from a bankruptcy lawyer.

Guide to getting legal help

Bankruptcy resources

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