Send Judgment Proof Letters
If you don't have anything that a creditor can take away from you to satisfy a judgment, and you don't have an income or your income is exempt from garnishment, you are considered judgment proof. If you are judgment proof, bankruptcy will not improve your situation. Many times, though not always, it is enough to send letters to your creditors saying you are judgment proof to keep them from trying to collect the money you owe them.
Filing for Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy allows you to discharge most debts. In other words, you will no longer have a legal obligation to pay those debts. Certain debts, for example student loans and most taxes, cannot be discharged. You may keep property that is considered exempt, but property that is not exempt may be sold and the proceeds used to pay the people you owe. Property that is usually exempt includes some equity (up to a certain amount) in your home and vehicle, necessary clothing, household appliances, and necessary household furnishings, among other things.
Once you have filed a Chapter 7, a federal court order called an "Order for Relief", also known as an automatic stay, is created. This means that, in most cases, your creditors must stop all collection efforts.
You may be able to file for Chapter 7 if your current monthly income is less than your state's median income. However, if your income is too much higher than your expenses, you may have to file for Chapter 13 bankruptcy instead.
Filing for Chapter 13 bankruptcy
Unlike Chapter 7, a Chapter 13 filing will not discharge your debts, but it will make it possible to pay off your debts over a 3 to 5 year period. Under a payment plan, you make scheduled payments to a Chapter 13 trustee who then distributes the payments to creditors. This allows you to keep property that you would have to give up in a Chapter 7 bankruptcy. Some debts must be fully paid, but some may be only partially paid off. Some debts that would not be discharged under Chapter 7, such as court fees, may be discharged under Chapter 13. Chapter 13 can also be used to save your home from foreclosure by giving you a chance to catch up on your mortgage payments.