Types of Bankruptcy

The Constitution of the United States gives citizens the right to relieve their debt when unable to repay lenders and creditors. There are two main types of bankruptcy — Chapter 7 and Chapter 13. Understanding the difference between these two types is important for anyone considering bankruptcy.

Chapter 7

With Chapter 7 bankruptcy, you can discharge some or all your debt owed following the application of liquid assets to debt owed. Liquid assets can be turned into cash easily and quickly. Examples include money held in a savings or checking account. Some liquid assets are exempt, however this is something that varies from state to state. After the application of the liquid assets to your debt, the remaining debt is charged off. The creditors and/or collection agencies to which the debts were owed cannot try to collect them anymore.

To file for Chapter 7 bankruptcy you have to get credit counseling from an agency approved by your state, and you must meet certain income requirements. Your income must be less than the median for your state and family size. If it is not, you cannot file this kind of bankruptcy. You can consider filing Chapter 13 bankruptcy.

Chapter 13

Chapter 13 bankruptcy is different from Chapter 7 because you actually repay your debt via a payment plan stretched out over three to five years. When filing for Chapter 13, you will have to present a repayment plan for court approval. The payments go to the court, who in turn distributes it to your creditors. Your creditors do have the option of objecting to the repayment plan, however the decision is in the judge’s hands.

This type of bankruptcy might be the right choice for you if your debt is secured, such as a car loan with a lien on it. Unlike Chapter 7 bankruptcy, Chapter 13 does not require you to use your liquid assets on debt repayment. With Chapter 13 bankruptcy you are still required to undergo credit counseling.

Because bankruptcy is a complicated legal process it is best handled by an experienced attorney. A bankruptcy attorney can help you choose the right type of bankruptcy filing, handle the legal paperwork and guide you through each step of the filing process.

Many attorneys offer free consultations where you can find out more about what they do and how much their services cost.