It is a common misconception that if a person files for bankruptcy their house, car and the clothes off their back will be sold to creditors to repay debts. Frankly, this isn t the case. Often times, a person will retain full possession of their house, car and family knickknacks.

In the United States, the three most common types an individual or business can file are Chapters 7, 11 and 13. Chapter 7 liquidates the debtor s nonexempt property to repay creditors. Chapter 11 is usually associated with businesses and allows the debtor to reorganize and repay debtors. Chapter 13 allows debtors who have a regular income to have their debts adjusted and repay them over a specified period of time. At TopTenREVIEWS We Do the Research So You Don't Have To. 

The chapter an individual qualifies for depends on a variety of variables. This is determined by a  means test,  which is a formula that includes a person s income and their total amount of secured and unsecured debts. Income is determined by the average amount of money a person has made in the last six months. Secured debts are typically things like car loans or mortgages, or property that has a lien on it. Whereas, unsecured debts usually consist of credit card or medical bill debts.

Debtors can have an attorney represent them or they can file pro se, which means they represent themselves. In a pro se filing, the debtor can use an online legal service to find and prepare legal forms. One such service is US Legal.

Chapter 7

When people say they are filing for bankruptcy, they are usually filing under Chapter 7. This is the most frequently filed chapter. Essentially, Chapter 7 liquidates all valuable property in order to pay off the debts. The court appointed trustee evaluates the value of a person s assets and sells them in order to repay creditors.

Trustees cannot sell assets that are considered  exempt property.  These exemptions typically include clothing, household furnishings, appliances, jewelry (up to a certain value), personal effects such as toothbrushes and electric razors, tools of trade or profession and certain amounts of equity acquired in a car or home. It is not unusual for a trustee to determine that a person filing for Chapter 7 does not own anything worth selling.

Depending on the type of debt, bankruptcy may not be the answer. Some examples of nonexempt debts are child support, car loans, mortgages and student loans. Debt acquired through fraudulent or malicious means may not be dropped.

Most Chapter 7 cases last between four and six months. After settling a chapter 7, a person is not eligible to file again for eight years. The Federal Bankruptcy Court adopted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to make it more difficult for consumers to abuse Chapter 7 laws.

Chapter 13

Chapter 13 is the second most popular form of individual bankruptcy claims. This is sometimes called a  wage earner s plan.  Unlike Chapter 7, a person filing for Chapter 13 agrees to repay all or some of their debt over the course of three to five years.

When debtors file under Chapter 13, they must propose a repayment plan that details how and how much they are going to repay creditors over the course of the next three to five years. The minimum repayment amount depends on how much the debtor earns versus how much they owe. A chapter 13 trustee is assigned to distribute the payments to creditors.

To qualify for Chapter 13, an individual has to have a steady income, less than $1,081,400 in secured debts and less than $360,475 in unsecured debts 11 U.S.C.   109(e).These amounts are periodically readjusted according to the consumer price index.

Chapter 11

Chapter 11 is usually reserved for businesses or individuals whose secured or unsecured debts exceed the limitations in Chapter 13. Similar to Chapter 13 laws, the debtor proposes a repayment plan. This is a very complex chapter. Many large corporations including Enron, Kmart and Delta have filed Chapter 11 cases.

Chapter 11 allows a business to continue normal operating procedures while their case is being reviewed. During this time, the debtor can only make normal sales and purchases that are a part of a usual business day. They may not sell part of the company or a major piece of equipment or property, or undergo major expansions.
As a result, a company filing under Chapter 11 may have to close locations, lay off employees or renegotiate union contracts. If it seems the company can no longer operate profitably while making payments, it may be converted to a chapter 7.

Additional Considerations

Bankruptcy is not a quick fix for all credit problems. There are adverse effects for filing. It affects credit scores and can in turn affect loan approvals and interest rates; however, many companies will still extend loans to those in bankruptcy.

In order to file, the debtor must take a credit counseling course from a government-approved organization pursuant to 11 U.S.C.   109(h)(1). Before the debtor s case can be discharged (meaning the allowable debt is wiped away), the debtor must take debtor education courses according to 11 U.S.C.   111.


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