Personal bankruptcy can be filed under chapter 7 (liquidation) or chapter 13 (repayment plan). All your non-exempt property is liquidated in the former, and unsecured nonpriority debts like credit card debt, medical bills, personal loans, etc., are discharged. In chapter 13, the debts are reorganized and paid through a 3-5 years repayment plan. The secured, priority, and unsecured non-priority creditors are paid in that order. The bankruptcy filing puts an automatic stay in place, which prevents any type of collection action by creditors.
Car loans and mortgages are secured debts. The creditors can repossess the property or foreclose on it on non-payment of debts. Most creditors don’t collect their own debts but hire professional collection agencies to help them. Sometimes, creditors can obtain a judgment to garnish wages or obtain levies on personal property. While bankruptcy is an excellent way to discharge debts, other non-bankruptcy options available to debtors include debt consolidation, debt reaffirmation, redemption, and negotiation with creditors. Though most debts are discharged in bankruptcy, certain debts like student loans, taxes, spousal, and child support obligations cannot be discharged.
When you file for bankruptcy, certain exemptions are provided by the state or federal government to protect your interest in your property. These include exemptions for homestead, household goods, vehicles, retirement accounts, tools of the trade, etc. While some states provide you a choice between state and federal bankruptcy exemptions, others allow only state exemptions to be used. However, you need to be a state resident for 730 days to use state exemptions. Additional requirements for bankruptcy filing include the mandatory pre-bankruptcy briefing and pre-discharge credit counseling.
This bankruptcy chapter is to help people with little to no income. Individuals need to pass the Means test to qualify for this bankruptcy chapter. If your average household income is less than the state median, you can file for this chapter. If the disposable income is more, whether it is sufficient to repay debts through a chapter 13 repayment plan is checked. If not, you are eligible for chapter 7 bankruptcy. In this case, the bankruptcy trustee liquidates the non-exempt property to repay the creditors. Once the discharge is given, the creditor cannot pursue you for non-payment of dues. However, if a lien secured the debts, the creditor can resume collection action for those debts. If you reaffirm your secured debts, you are liable for their payment even after bankruptcy discharge. Usually, a chapter 7 bankruptcy is a no-asset case which means there isn’t enough to pay the creditors. Once the papers are filed, a creditors’ meeting occurs within 30 days. Usually, a discharge is granted within 3-6 months of filing the papers.
Individuals who cannot file under chapter 7 can file for bankruptcy under chapter 13. This chapter is ideal for people with regular disposable income through which the debts can be paid off. Any unsecured nonpriority debt that remains after completing the repayment plan (3-5 years) is discharged. Chapter 13 offers certain advantages over chapter 7. For example, you can keep your non-exempt property in chapter 13 if you can pay an amount equivalent to it to your unsecured creditors. Additionally, it also allows you to catch up on past due payments on your secured debts like mortgages and car loans.