People who are facing serious credit problems such as garnishment or repossession often will file bankruptcy to prevent those things from happening. Filing bankruptcy will also stop the harassing phone calls and nasty letters.

Filing bankruptcy is a way to discharge your debts by filing insolvency through a bankruptcy court. Once you file the federal government immediately halts your creditors from contacting you in an attempt to collect a debt. Once the bankruptcy is discharged that creditor can never again attempt to collect from you. In some cases if your creditor has given you a secured loan they may be able to take possession of the property that was used for security.

Once you have gone through bankruptcy court and the courts find that you are indeed bankrupt the courts will then discharge your debts. The discharge relieves you from your debt obligations and the creditors will not have any claim on your future income. If the debtor has any non-exempt property they will have to turn that property over to the bankruptcy trustee who will then sell the property and give the proceeds to the creditors.

You have a choice of filing options when considering bankruptcy. Chapter 7 is often referred to as liquidation bankruptcy. With Chapter 7 you relinquish all non-exempt property to the trustee who will then sell it. The benefit to you is you will have forgiveness of your debt and will be able to make a fresh start. Each state has different laws but with Chapter 7 you will be allowed to keep certain assets like retirement accounts and checking accounts up to $2,500. You may also be allowed to keep your home and automobile under certain conditions.

Chapter 13 allows the debtor to reorganize and keep most, if not all, of their property. The Chapter 13 plan allows you to make monthly payments to the trustee who will then distribute the money to the creditors. The advantage to this chapter is the fact that you will have all of your debts consolidated and will only have to make one payment each month. At the end of the bankruptcy term, usually three to five years, your debts will be considered paid and you will not have any further obligation to the creditors. The creditors will not get all of the money that is owed them but they will at least get a large portion of it. Credit cards will have to settle for the principal amount instead of adding interest to the payment.

While under Chapter 13 supervision the debtor must make timely payments to the trustee and they cannot take on any further debt unless given permission by the courts. They are also prevented from selling certain assets until after the bankruptcy has been discharged. If the debtor fails to make timely monthly payments the creditors can then petition the courts to allow them to ask for the entire amount they are owed. Failing to make timely payments may also force you into Chapter 7 where you may lose some of your property.

If you owe certain taxes you can stop the collection efforts by filing bankruptcy but you generally cannot discharge tax debt. Once the bankruptcy is discharged by the courts you will then have to pay the tax debt, plus any interest that has accrued.