Bankruptcy

    When your debt is more than you can repay, this may be a necessary step.  It may stop a foreclosure.  You may be able to save your home. Interest may stop accruing on debts.  Certain debts may be discharged, which means you may no longer owe the money.  Debt collectors will have to stop calling.  This process allows you to make a fresh start.  The two most common options in filing are:  a chapter 7, where most of your debt is discharged, but some assets may be sold; and a chapter 13 where you repay your debt over 3-5 years.  

    The simplest explanation of bankruptcy is that the day you file for bankruptcy is known as the petition date.  This is because what you file is known as a petition.  It is what lets the world know you are filing bankruptcy.  The moment you file bankruptcy, it is as if a big guillotine falls down.  Everything is then known as a pre-petition or post-petition debt.  Pre-petition debts are debts that you incurred prior to the petition debt, in other words, your old debts.  Post-Petition debts are new debts, these are debts you manage to accumulate after you filed bankruptcy. 

    If Joe Debtor puts a sweater on his credit card, he now has a debt to the credit card company.  If after he acquires this debt he files bankruptcy, then this will be a pre-petition debt.  It was a debt he had before he filed.

    If Joe Debtor files for bankruptcy and while the case is still going on, someone lends him new money.  This is a new debt.  It was acquired after the bankruptcy was filed for and is known as a post-petition debt.  (Yes, there are people who will still extend credit during and after bankruptcy.) 

    A common type of post-petition debt is mortgage payments.  It may be possible to keep your house while going through the bankruptcy process and after the process is over.  In order to do this, you must be able to make your regular monthly mortgage payments.  When many people begin the bankruptcy process, they are behind on their mortgage payments.  The payments that are behind are known as mortgage arrears.  These mortgage arrears are listed on the bankruptcy petition and are considered pre-petition debt.  If you miss payments after you file for bankruptcy, the new months that the mortgage payments are behind are known as post-petition debt.

    So what happens to pre-petition debt?  This depends on many factors including what chapter you file, what type of debt it is, and whether you want to keep the property. 

    Chapter 7 is known as the liquidation chapter.  This means that whatever property is not exempt or excludable is sold to pay your creditors. 

    Chapter 13 involves a plan where you pay certain creditors back over a period of 3-5 years.  This is usually the method people choose when they want to keep their home and pay the bank back their old mortgage payments over several years.   

    Some debts under both chapters remain and some debts are discharged (meaning they go away).