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Bankruptcy refers to a federal court procedure that allows debtors to catch up on their debts by having some of them discharged and others repaid, depending on the type of bankruptcy. The process is available to both businesses (which often file for Chapter 11) and consumers (usually Chapter 7 or Chapter 13).
Bankruptcy can help you get rid of some, but not all, kinds of debt. For instance, unsecured debt from credit cards and hospital bills may be forgiven in many cases. But child support, alimony, and taxes may not be discharged. Student loans are not dischargeable unless the debtor can prove that repayment would cause an undue hardship (which is very difficult to prove). Also, creditors may argue that a given debt should not be discharged, subject to the bankruptcy judge’s approval.
Chapter 7 is called “liquidation” bankruptcy because filers may lose some of their property, with some important exceptions. Chapter 7 is reserved for individuals and businesses with little or no ability to repay debts in the future. So those who file Chapter 7 may lose non-exempt assets in exchange for having most debts erased.
Chapter 13 is called “reorganization” bankruptcy because it allows consumers to reorganize their debt burdens and payment schedules. Anyone filing for Chapter 13 must also propose a repayment plan showing your income and how you will pay off your debts. Working with the court, your plan will determine how much you need to repay, based on your income, debt load, and the value of your property.
For those with a steady income that exceeds Chapter 7’s limitations, but who face unmanageable debts, Chapter 13 may be the best (if not only) option. One of the upsides of a Chapter 13 bankruptcy is that the debtor often retains much of their property. Under Chapter 7, various types of property may be subject to liquidation or sale, to repay creditors. State laws differ on the types of property considered eligible (nonexempt) or ineligible (exempt) for sale in a Chapter 7 case. Check out FindLaw’s Exempt vs Non-exempt Property Under Chapter 7 for more information and specific examples.
If you meet the eligibility requirements for both Chapter 7 and Chapter 13 bankruptcy, then you may choose which type to file. Otherwise, you may not have a choice.
Those with an income higher than the median income for a similarly sized family are not eligible for Chapter 7 if they would be able to repay some of their unsecured debt within five years. To be eligible for Chapter 13, you must not exceed a certain level of debt (see Individual Debt Adjustment for current limits). If you don’t meet these requirements, then Chapter 13 bankruptcy is not available to you.
Usually, those who have a choice in the matter go with Chapter 7 bankruptcy, since they may be able to have all of their debts discharged (besides the debt covered by the proceeds of liquidated property). Chapter 7 also can be a much faster process than Chapter 13. However, Chapter 13 may be the best option for those who have adequate income and substantial assets.
Chapter 7 – Bankruptcy takes about 5 months, although your dischargeable debts are gone the day we file your case.
Chapter 13 – Debt Consolidation takes 3 to 5 years to repay debts unless you decide to pay faster.