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Bankruptcy Basics

When you file for a chapter 7 bankruptcy, an order known as the automatic stay prevents most creditors from calling you anymore and continuing to collect money, including wage garnishment.

Chapter 7 bankruptcy erases debts such as medical bills, personal loans, and credit card balances in about three or four months. You will not be required to pay back those creditors. Rather, a court-appointed bankruptcy trustee sells your property that can’t be protected by a bankruptcy exemption to help compensate your creditors. Most household belongings are exempt, such as clothing, furniture, retirement accounts and, within limits, homes, and cars.

Chapter 7 bankruptcy is an effective tool for low-income debtors without significant assets, who can’t commit to a three-year repayment plan and don’t have debts like alimony or child support, which cannot be discharged in bankruptcy. Before choosing this approach, calculate whether the amount of debt you’d wipe out would be more than the value of the property you’d lose.