What exactly is bankruptcy?
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as "liquidation" or "reorganization."
Under a liquidation bankruptcy ( Chapter 7), you ask the bankruptcy court to wipe out (discharge) the debts you owe. Under a reorganization bankruptcy typically Chapter 13, for consumers), you file a plan with the bankruptcy court proposing how you will repay your creditors. You must repay some debts in full; others may be repaid only partially or not at all, depending on what you can afford.
What is the difference between Chapter 7 and Chapter 13 bankruptcy?
In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection (see "What property might I lose if I file for bankruptcy?" below), sell it, and distribute the proceeds to your creditors. For more information on Chapter 7, see An Overview of Chapter 7 Bankruptcy.
In Chapter 13 bankruptcy, you file a repayment plan with the bankruptcy court to pay back your debts over time. The amount you'll have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own. For more information about Chapter 13, see An Overview of Chapter 13 Bankruptcy.
Will I lose my house or apartment?
One of the biggest worries you may face in considering filing for bankruptcy is the possible loss of your home. Though there are a few situations where you may lose your home, keep in mind that bankruptcy is not designed to put you out on the street.
Home Ownership and Bankruptcy.
If you are behind on your mortgage payments, you will almost certainly lose your house if you file a Chapter 7 bankruptcy. Your mortgage lender will ask the bankruptcy court to lift the automatic stay to begin or resume foreclosure proceedings. In a Chapter 13 bankruptcy, you will not lose your house if you immediately resume making the regular payments called for under your agreement and repay your missed mortgage payments through your plan.
If you are current on your mortgage payments, you will not lose your house if you file for Chapter 13 bankruptcy, as long as you continue to make your mortgage payments. In Chapter 7 bankruptcy, whether or not you will lose your house depends on the amount of equity you have in the property and the amount of any homestead exemption (which varies state-to-state) to which you are entitled.
If the total amount of debt against your house is less than the market value, you may lose your house unless a homestead exemption entitles you to all or most of the equity.
Renting and Bankruptcy.
If you are current on your rent payments and file for bankruptcy, it's unlikely your landlord would ever find out. But if you are behind on your rent, there's a good chance that your landlord will begin eviction proceedings to get you out. Your inclination may be to file for bankruptcy just to get the automatic stay in place to stop the eviction. This will work, but not for very long. Expect your landlord to come into court to have the stay lifted, which is likely to be granted.