New Mexico Legal Aid

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  • Bankruptcy is a legal step people can take to get out of debt when they owe a lot of money.
  • Bankruptcy is a request to a court to provide relief when you are unable to pay your debts (for example, car payments, mortgage, utility bills, etc.).
  • Bankruptcy may offer you a fresh start if you can no longer afford to pay your bills.
  • Debt collectors will stop calling. As soon as you file your case with the court, almost all collection actions are stopped. This means debt collectors are not allowed to contact you while your case is active. There are a few exceptions. Debt collectors can contact you if you owe money for child or spousal support, taxes, or court-imposed fines related to a crime.
  • You can start over. Sometimes, the amount of money you owe feels overwhelming. You may not have a realistic way to catch up. With a Chapter 7 bankruptcy, you could get rid of the obligation to pay back most of your debts.
  • You may be able to keep your home. The bankruptcy will temporarily protect you from foreclosure. With a new payment plan, you may be able to catch up on your mortgage payments.
  • It will be harder for you to get new loans or credit cards. Your credit score is based mostly on your payment history. Your bankruptcy will make that score much lower for as long as 10 years. Banks and credit unions use these credit scores to decide if they can trust you to pay back a loan or make payments on a credit card. Even if you do get new credit, the interest rates may be very high.
  • You may lose some things you own. Chapter 7 bankruptcies include a process called “liquidation.” That means some of the things you own (property) can be taken and sold without your consent to help pay off your debts. Some of your property, however, will be protected. The property that is protected can differ by state and territory, but usually you can keep your clothing, furniture, and appliances. You can also keep your home and car (or other vehicle) if you’re up to date on those payments or if your vehicle is worth less than a certain amount. In most Chapter 7 cases, you can protect only one vehicle per working adult.
  • You lose some future options for dealing with financial problems. If you file for Chapter 7 bankruptcy and don’t have to pay some of your debts, you must wait for a set time period before you can file for bankruptcy again. The waiting period is eight years for a Chapter 7 filing and four years for a Chapter 13 filing.
  • Your take-home pay may be lower. Chapter 13 payment plans often involve taking money out of your paycheck to make your new payments.
  • You lose some financial privacy. The court and a trustee assigned to your case will look over your personal finances with a fine-toothed comb. This examination happens in every bankruptcy.

Types of Bankruptcy

  • In a Chapter 7 bankruptcy, you’re asking the court to discharge some of the debts owed before you filed for bankruptcy.
  • “Discharging a debt” means no one can try to collect the money from you for debts such as
    • credit cards
    • medical bills
    • utility bills
    • missed rent payments
      • CAUTION: Your landlord may still be able to evict you for non-payment of rent.
    • missed mortgage payments
      • CAUTION: Your mortgage lender could still take back your home.
  • Upsolve is a free resource that you can use to prepare and file your bankruptcy documents. (Upsolve is a nonprofit partially funded by the Legal Services Corporation (LSC).)
  • “Debt restructuring”
    • After this type of bankruptcy, you’ll still have debts
    • Creates a new plan that lets you make smaller payments over a longer time period to pay back what you owe
    • Could reduce the amount you owe.
    • Helpful for keeping your home, vehicles, and other items you purchased with loans.
      • EXAMPLE: Homeowners may file for Chapter 13 bankruptcy to catch up on mortgage payments over a five-year period.
    • Student loans: very rarely discharged in Chapter 13 bankruptcy, but the loan payments are often delayed or reduced.

Common Bankruptcy Issues

  • Bankruptcy will not get rid of your responsibility for
    • Taxes
    • Alimony
    • Child support
    • Student loans
      • EXCEPTION: You may file a separate request with the court called an “adversary proceeding” to clear student loan debt, and you would have to show that repayment of your student loans would impose undue hardship on you and your dependents.
  • There are many things to consider before filing for bankruptcy:
  • Amount of money you owe.
    • You may want to file for Chapter 7 bankruptcy protection if you don’t think you’ll ever be able to pay back the amount you owe for things like medical bills or credit card balances.
    • You might consider Chapter 13 bankruptcy protection if you think you can pay back what you owe if you are given more time to pay and a lower monthly payment.
    • When you would not want to file for Chapter 13 bankruptcy protection
      • if the money you owe on your home and car payments would be too much to pay back even with more time to pay and a lower monthly payment.
    • Type of debt you owe. Some types of debt cannot be removed through bankruptcy. Examples include alimony, overdue taxes, and child support. You want to make sure bankruptcy will get rid of enough of your debt to be worth the downsides.
    • Items you might lose if you do not file for bankruptcy.
      • How much do you need the things that creditors or other debt collectors might take from you if you cannot pay?
        • There are limits on what types of things or income can be taken from you
      • Collectors could also get a court judgment to have money taken out of each paycheck you receive to pay your debt to them.
        • There is a limit on how much money can be taken from each paycheck.
          • “Judgment Proof” or “Collection Proof.”
            • You don’t have anything for a creditor to collect, even if they sue you and win. 
              • typical household goods, health aids, clothing, and a vehicle up to a certain value.
                • certain sources of income. Social Security benefits.
                • Supplemental Security Income benefits.
                • Public assistance payments.
                • Unemployment benefits.
                • Department of Veterans Affairs benefits.
                • Child support.
                • Federal employee and civil service retirement benefits
  • You must take a credit counseling course no more than 180 days before filing a bankruptcy case to ensure you have considered other options before declaring bankruptcy.
  • Click here for a list of U.S. Dept. of Justice approved credit counseling agencies.
  • You must file your bankruptcy case at your local federal bankruptcy court.
  • You will need to include many documents, including
    • Pay stubs or other proof of income.
    • Tax returns.
    • Bank statements.
    • Retirement account or brokerage account (stock) statements.
    • A list of your creditors — all the lenders or providers you owe money to. This list should also include money you owe to friends or family members.
    • A list of all your assets — everything you own.
  • More than $300.
  • Fees could change, so check with the court where you plan to file.
  • You may be able to pay your filing fee a little at a time instead of all at once
  • In some Chapter 7 bankruptcy filings, you can ask the court to cancel the fee.
  • A Chapter 7 bankruptcy case is usually quick, finishing about 60 days after the first court hearing.
    • Ends after you receive a discharge notice in the mail.
  • A Chapter 13 bankruptcy case remains open until you complete your payments under the plan.
    • Payoff plan can last for up to five years.

How to reach us

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