Chapter 1: What Is Bankruptcy?
Bankruptcy is a process under federal law designed to help consumers and businesses resolve debt problems. Most people who file for bankruptcy do so with the assistance of a legal professional.
The two common types of consumer bankruptcy are Chapter 7 and Chapter 13.
In a Chapter 7 bankruptcy, certain non-exempt assets may be liquidated to pay off as much of the debt as possible and the remaining debt will be discharged. Non-exempt property is assets or belongings that are not considered protected under bankruptcy law. Consumers must provide detailed financial information when filing bankruptcy so the court can determine which assets may be sold.
Generally, not every type of debt can be discharged in a Chapter 7 bankruptcy, however many unsecured debts may be dischargeable.
Filing a Chapter 7 bankruptcy stops efforts by creditors to collect on debts. If your income exceeds the median income for your area, you will have to complete a means test. A means test determines whether you have enough money to repay at least a portion of what you owe and can impact whether bankruptcy is a viable option for you.
This type of bankruptcy will be reflected on a credit report for ten years.
A Chapter 13 bankruptcy is a court-approved plan for repayment of some or all of the outstanding debt. Typically the repayment plan lasts 36 to 60 months. As they are repaying at least a portion of what they owe, filers may keep their assets. Many different types of debts may be included in a Chapter 13 bankruptcy.
Filing a Chapter 13 bankruptcy stops efforts by creditors to collect on debts. The filer will provide details of his financial situation and the bankruptcy court will determine the details of the payment plan, such as the percentage of debt to be repaid and the monthly payment amount.
This type of bankruptcy will typically be reflected on a credit report for seven years.