It's not easy deciding on whether or not to file bankruptcy. There's no magic formula to tell you if it's right for you. However, if you're overwhelmed with credit card and other debts or facing foreclosure, and you've tried all other options, bankruptcy may be your best and only chance at a fresh start. You need to know some basics of how the process works. For the most part, bankruptcies are controlled by federal law, the Bankruptcy Code. State laws may also play a big role, especially on your decisions about whether or not to file and which type of bankruptcy is best for you.
Starting Out and Bankruptcy Options
There are two main types of bankruptcy cases individuals use, Chapter 7 and Chapter 13. Both give you relief from your debts and a fresh financial start through discharge, the court's order ending your liability to pay and your creditors' ability to collect. For example, in a Chapter 7 bankruptcy, many of your debts are wiped out - you never have to pay them back. In Chapter 13, you agree to repay most of your debts over a period of time.
For the most part, all bankruptcies are controlled by federal law, or the US Bankruptcy Code. It spells out in detail how the whole process works.
Chapter 7 is also known as "straight bankruptcy," and it's the most common type of case. Someone who uses Chapter 7 has few or no assets available to pay creditors, and the discharge applies to most debts. Discharge means to waive or dismiss your debts.
Key points to know about Chapter 7 are:
- You must qualify to file Chapter 7 based on your income and a means test set out in bankruptcy law. If you can afford to repay a portion of your debts, you may have to use Chapter 13
- Your available assets, called nonexempt property, may be sold by the bankruptcy trustee to pay your creditors
- You keep exempt property, which is protected from your creditors' reach
- The Chapter 7 discharge applies to most common debt types, including credit cards and medical bills
Most Chapter 7 cases are "no-asset," meaning there's nothing left to pay creditors after accounting for your property exemptions. State or federal law control property exemptions, and this is why bankruptcy cases can be different from state to state.
Chapter 13 reorganizes your debts: You make partial or full payments according to a repayment plan, and remaining debts are discharged at plan completion. If you have a certain amount of stable disposable income after paying for the basics, Chapter 13 may be your only bankruptcy option.
The repayment plan is the main part of a Chapter 13 case and property exemption laws factor into figuring out repayment plan details.
Here are some common situations behind Chapter 13 cases:
- You have mortgages or loans you want to bring current through the repayment plan, allowing you to keep the property
- Your debts are ineligible for a Chapter 7 discharge, such as taxes, child support or student loans
- You're driven to pay off debts by personal values or morals
This type of bankruptcy strikes a middle ground between you and your creditors. You get some debt relief, and creditors get some payment.