Bankruptcy is when you file a case in federal court to help you or your business to get rid of your debt and repay your creditors. There are 2 basic types-
- Liquidation/ chapter 7
- Reorganization/ chapter 11/ chapter 12/ chapter 13
Among these two, the most commonly filed are chapter 7 also known as liquidation where you may have to sell almost all your assets to repay your debts, and chapter 13 also known as reorganization where you are allowed to keep your assets in return for you repaying most or all of the debts within 3-5 years period according to a repayment plan.
All about chapter 7 bankruptcy
To be qualified for chapter 7 bankruptcy filing you will have to take a means test which will determine whether or not you can file chapter 7. Your case will be closed within 6 months.
In chapter 7 bankruptcy, you may need to sell most or all of your property to repay your debts, except your exempt property which is necessary things that you will require daily like a primary residence, clothes, furniture, and a vehicle if you have one, etc. Here unsecured debts are discharged and some types of secured debts can also be discharged under certain situations. Although debts like alimony, child support, and student loans cannot be discharged under chapter 7 bankruptcy.
In secured debt, the debtor has a choice whether you can continue repaying the debt the way you were or give an equal amount of the collateral to the creditor and get rid of the debt.
Chapter 13 bankruptcy
It is also called a “wage earner” bankruptcy because only people with a regular and stable source of income can file.
To be eligible for filing chapter 13, you must be able to show proof that your debts are under the limits of filing. If it is more or less than the limit, you will not be able to file for chapter 13 bankruptcy.
Here, the court with you will come up with a repayment plan for all or most of your debts. Your plan will go on for 3-5 years depending upon your income, total debt, and how much money your unsecured creditors will get (It has to be equal to what they would have gotten if the debtor had filed chapter 7). You can even include all your late payments in your plan. It stops the creditor from repossession or foreclosure of your property.
Chapter 11 bankruptcy
Usually, chapter 11 is filed by struggling businesses who want to get back on track and repay their debts. But individuals do file chapter 11 when he/she can’t file for chapter 13 or have a lot of non-exempt property. However, it is very time-consuming and expensive than Chapter 13 bankruptcy.
Chapter 12 bankruptcy
Chapter 12 bankruptcy is almost the same as chapter 13 bankruptcy except that only people who have debt from a family farm or fishing operations can file chapter 12.