Skip to main content
Disaster Legal Services

Bankruptcy

Bankruptcy is a legal process that can help people or businesses who are unable to pay their debts. It is handled through the court system and may provide relief from collection efforts while creating a path to address what is owed.

For many people, bankruptcy may offer a fresh start when bills such as credit cards, medical debt, car payments, mortgage payments, or utilities have become overwhelming. It does not erase every type of debt, and the right option depends on a person’s income, property, and financial goals.

Two common types of consumer bankruptcy are Chapter 7 and Chapter 13. Chapter 7 may involve selling non-exempt property to pay creditors, while Chapter 13 allows individuals with regular income to repay debts through a court-approved plan over time.

Because bankruptcy can affect your credit, property, and long-term financial options, it is important to understand the process before filing. 

Speaking with a qualified bankruptcy attorney or approved credit counselor can help you decide whether bankruptcy is the right step for your situation.

Ways Bankruptcy Can Help You

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.

Ways Bankruptcy Can Harm You

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 (ten) 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 8 (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

Chapter 7 Bankruptcy: Discharge Debts

In a Chapter 7 bankruptcy, you’re asking the court to discharge some of the debts owed before you filed for bankruptcy. Chapter 7 bankruptcy may eliminate many unsecured debts. 

A debt is unsecured when it is not tied to specific property that a creditor can take back if payments are missed. Unsecured debts are often the main debts addressed in Chapter 7. If the debt qualifies for discharge, the filer is no longer personally responsible for paying it after the bankruptcy discharge is entered.

“Discharging a debt” means no one can try to collect the money from you for debts.

Common examples of debts that may be discharged in Chapter 7 include:

  • Credit card balances
  • Medical bills
  • Personal loans
  • Old utility bills
  • Collection accounts
  • Deficiency balances after repossession or foreclosure
  • Missing 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)

Debts Not Discharged

Chapter 7 does not erase every debt. Some debts may remain after bankruptcy, either because the law excludes them from discharge or because a creditor successfully asks the court to keep the debt from being discharged.

Examples of debts that are commonly not discharged include:

  • Certain tax debts
  • Child support and alimony
  • Most student loans, unless the filer proves undue hardship
  • Debts based on fraud or false statements
  • Court fines, criminal restitution, or certain government penalties
  • Debts from willful or malicious injury

Because discharge rules can be complex, anyone considering Chapter 7 should review their specific debts with a qualified bankruptcy attorney before filing.

Chapter 13 Bankruptcy: Debt Restructuring/Reorganization
Chapter 13 bankruptcy is a court-supervised repayment plan for individuals with regular income. It allows a person to reorganize debt and make payments over time, usually over three to five years, while receiving protection from many collection efforts. 

In Chapter 13, the filer proposes a repayment plan to the bankruptcy court. Payments are made to a trustee, who then distributes funds to creditors according to the approved plan. At the end of a successful plan, some remaining eligible debts may be discharged. It may be helpful for people who have income but need time to catch up on protect important property, keep a vehicle while paying past-due amounts over time, manage support payments, stop or delay foreclosure, repay unsecured debt based off of income, or organize debts into one structured plan.

Chapter 13 can affect credit, property, monthly income, and long-term financial options. 

Secured debts are tied to property, such as a home mortgage or car loan. Chapter 13 may allow past-due amounts on secured debts to be paid over time. Unsecured debts, such as credit cards, medical bills, and personal loans, may be paid in full, in part, or sometimes only a small percentage, depending on the repayment plan.

Debts Not Discharged

Chapter 13 does not erase every debt. Some debts may still need to be paid during or after the repayment plan.

  • Child support and alimony
  • Certain tax debts
  • Most student loans, unless the filer proves undue hardship (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).
  • Criminal fines, restitution, or certain government penalties
  • Long-term debts, such as a home mortgage, if payments continue after the plan

Deciding Whether to File a Bankruptcy Case

Bankruptcy can provide important relief, but it is a major financial and legal decision. Before filing, it is best to take time to understand your full financial picture, compare available options, and speak with qualified professionals.

  • Review your complete financial situation: Create a list of all income, monthly expenses, assets, debts, interest rates, collection notices, lawsuits, garnishments, foreclosure notices, and repossession risks. This helps show whether the problem is temporary, manageable with a payment plan, or serious enough to consider bankruptcy. 
  • Consider non-bankruptcy options first: Bankruptcy may not be the only solution. Some people may be able to resolve debt through budgeting, creditor negotiations, loan modification, hardship programs, nonprofit credit counseling, or a debt management plan. These options may reduce pressure without requiring a bankruptcy case.
  • Understand which chapter fits your situation: Chapter 7 and Chapter 13 work differently. Chapter 7 may help eliminate qualifying unsecured debts, while Chapter 13 may help someone with regular income catch up on missed payments through a repayment plan. The right choice depends on income, property, debt type, filing eligibility, and long-term goals.
  • Know what bankruptcy can and cannot do: Bankruptcy may stop many collection actions, discharge certain debts, or create time to reorganize payments. However, it may not eliminate every debt, remove all liens, prevent every loss of property, or solve future budget problems. Understanding these limits helps prevent surprises after filing.
  • Complete required credit counseling: Most individual bankruptcy filers must complete approved credit counseling before filing, with limited exceptions. Credit counseling can also help identify whether bankruptcy, a repayment plan, or another debt solution may be appropriate.
  • Speak with a qualified bankruptcy attorney: Because bankruptcy rules are detailed and each person’s financial situation is different, it is wise to speak with a qualified bankruptcy attorney before filing. An attorney can help review exemptions, discharge issues, secured debts, timing concerns, and whether Chapter 7 or Chapter 13 is the better option.

Filing a Bankruptcy Case

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

Bankruptcy is governed by the Federal Rules of Bankruptcy Procedure and local rules of each bankruptcy court. You must file your bankruptcy case at your local federal bankruptcy court. Check the local court's website for any specific local requirements you might need to meet.

You will need to include many documents, including:

  • Credit counseling certificate received from an approved credit counseling agency
  • Pay stubs or other proof of income- received within 60 days before you filed your bankruptcy case.
  • 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

Chapter 7 & Chapter 13 filings may request different forms and documents.

Cost of Filing for Bankruptcy

Click here to see the United State Bankruptcy Court, District of New Mexico Fee Schedule (Effective December 1, 2023).

  • 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 (usually installments within 120 days to pay in full). You will need to submit an application for this. 
  • In some Chapter 7 bankruptcy filings, you can ask the court to waive the fee. 
    • Eligibility requirements: 
      • You are filing for bankruptcy under Chapter 7
      • You are an individual
      • Total combined monthly income for your family is less than 150% of the official poverty guidlines last published by the U.S. Department of Health and Human Services. 
      • You cannot afford to pay the fee in installments

For more information click here. 

Bankruptcy Resources

MENU CLOSE