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How Chapter 7 Bankruptcy Helps You

Whether or not you plan to give up your house, you can buy some time just by filing for bankruptcy. As soon as you do, foreclosure proceedings must stop—at least for a while. When you file for bankruptcy, the federal bankruptcy court automatically issues a court order called a stay. It bars creditors, including mortgage lenders, from taking any measures to collect a debt you owe unless the court holds a hearing and grants permission.

The automatic stay immediately stops foreclosure actions. If, for example, your home is due to be sold at auction on December 5 at 10 a.m., and you file for bankruptcy at 9:59 a.m. that day, the sale is “stayed” and has no effect even if it goes ahead after you file. But if you filed at 10:01 a.m., the sale would go through.

Chapter 7 bankruptcy is what most people think about when they think about bankruptcy. It’s called “liquidation” bankruptcy because it cancels your debts, but you might have to let the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors.

Every state has laws, called exemptions, which let you keep certain property. As a general rule, you can keep tangible personal property, especially basics such as furniture, clothing, personal effects, tools of the trade, cars, books, TVs, computers, and other necessities of life. You can also keep at least some equity in the house where you’re living when you file for bankruptcy (this is called a homestead allowance).

You must give up other (“nonexempt”) property to be sold to help pay off your debts. Many people don’t have any nonexempt property. But if you own luxury items such as a boat, an RV, a valuable coin collection, corporate securities, an ownership interest in a business, or an expensive car in which you have considerable equity, they’ll be sold to repay some of your debts.

Once the bankruptcy trustee (the person employed by the court to supervise your assets and pay creditors) has paid creditors whatever money is available, your remaining debt is cancelled (discharged). There are certain kinds of debts, though, which can’t be discharged in bankruptcy (see below).

It takes only about three months for a Chapter 7 bankruptcy case to go through court. Unless you can use bankruptcy to get rid of nonmortgage debts and manage to keep your house (as discussed below), the foreclosure proceedings will start up again after your bankruptcy case is finished.