In the United States, the most common kinds of personal bankruptcy filings are under Chapter 7 or Chapter 13 proceedings. The first kind, Chapter 7, is commonly referred to as a personal liquidation and allows the filing party to wipe out significant chunks of personal debt. Chapter 13 bankruptcies are known as personal reorganizations, whereby the terms of the debtor’s obligations are changed and a new repayment plan is created over a three- to five-year period.
Chapter 7 bankruptcies are supposed to be reserved for those individuals who are in very dire financial straits. If there is a prospect of repayment, even under slightly reduced terms, Chapter 13 is considered the more appropriate route.
In many states, individuals with high incomes are unlikely to qualify for a Chapter 7 bankruptcy. Eligibility requirements vary from place to place, but all filers are subject to a financial interview process, known as means testing, whereby their ability to make payments is assessed.
Chapter 7 Bankruptcy
Under a Chapter 7 bankruptcy, the individual debtor declares all of his financial obligations and assets, pays off what he can afford, and is subsequently forgiven the remaining debt – although certain kinds of debt are exempt. It is possible that the bankruptcy court will force the filing individual to sell certain assets for repayment, but many important assets, such as a home and primary vehicle, are exempted.
There are three important terms to understand with regards to a Chapter 7 bankruptcy: automatic stay, reaffirmation and discharge.
Once an asset or debt is listed under the bankruptcy, is goes under the protection of automatic stay. Creditors may no longer attempt to collect on the debt or repossess an item. Some debts can be reaffirmed by the debtor, which means he releases them from stay and will make a good-faith effort to repay to the creditor. Finally, all discharged debts in a bankruptcy are wiped out, and the filer is no longer considered responsible for them.
Unless under special circumstances, nobody may declare Chapter 7 on two separate occasions within six years.
Chapter 13 Bankruptcy
When an individual files for Chapter 13 bankruptcy, he agrees to pay a specified amount of disposable earnings to the bankrupcty trustee over a three- to five-year period. The trustee collects and distributes those funds on behalf of creditors. Once this reorganization period ends, all remaining debts are discharged.
The trustee plays a very large role in Chapter 13 bankruptcies. Filers are not allowed to sell assets without consulting and receiving permission from their trustees during the repayment plan. Filers must report any changes in income to the trustees. Creditors speak to the trustees during this process, not the filers.
Certain debts are only dischargeable through a Chapter 13 filing. These include certain kinds of child support owed to collection agencies, non-exempt income taxes, old liabilities from divorce proceedings, court fees, homeowners association fees and loans from retirement plans.