There are two different bankruptcy procedures for individuals. These proceedings are known as Chapter 7 and Chapter 13. While you may be familiar with the term Chapter 11 from the news, that chapter applies to business owners only.
Prior to October of 2005, going through a personal bankruptcy was a fairly simple and painless process. It did ruin your credit but it also allowed for a more liberal discharging of debt. In 2005, the law changed and is designed to provide an incentive to people to file under Chapter 13 rather than Chapter 7. For people with a steady income, Chapter 13 allows them to keep some property like a house or a car that they would otherwise lose in a Chapter 7 filing. Chapter 13 is a court approved “pay back” plan that can run for as long as five years.
Chapter 7 is known as straight bankruptcy, and involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings. Other property could be sold by a court appointed trustee or given directly to a creditor as payment of your debt. There is also a limitation of how much you can earn during this process. It is not designed for you to profit by not having to pay your debts.
There is another significant difference between Chapter 7 and 13. With Chapter 7, a person must wait eight years before they are able to file it again. Chapter 13 has only a two year waiting period before a person can refile.
Both types of bankruptcy can get rid of unsecured debts and stop foreclosures, repossessions, garnishments and debt collection activities. Both can provide exemptions that allow people to keep certain assets, although exemption amounts will vary by state. Obligations that cannot be satisfied by either form of bankruptcy include child support, alimony, fines, certain taxes and student loan obligations both government and privately funded.
Unless you have an acceptable plan to satisfy your debt under Chapter 13, the court usually will not allow you to keep property when the creditor has security lien on it. This could include your home as well as well as boats, vacation homes, recreational vehicles etc.
As part of the new law, persons seeking to file under either chapter have to have attended a government approved credit counseling course within six months of filing. The idea here is to try and solve the credit problem without taking legal action. The second major change just involves Chapter 7. Today you have to satisfy a “means test” to confirm your income does not exceed a certain amount. This amount will vary by state. You can find those limits here.
There are other strategies to settle your debt without going through bankruptcy. It all depends on your personal situation and what best makes sense for you and your family. Any decision to file for bankruptcy should not be made without consulting a qualified bankruptcy attorney.