The Bankruptcy Code is divided into several chapters that relate to specific bankruptcy actions. The two most common types of individual bankruptcies are found in Chapter 7 and Chapter 13 of the Bankruptcy Code. The choice of filing a case under one of these chapters depends on a number of variables and the individual’s financial circumstances.
A Chapter 7 case is sometimes described as an “erase your debts and start fresh bankruptcy.” The basic concept of a Chapter 7 case is that creditors receive whatever they are legally entitled to collect on the date the bankruptcy case is filed. Legal exemptions protect most or all of a Chapter 7 debtor’s property, so creditors generally receive nothing. Unpaid unsecured debts (e.g. credit cards, medical bills) are discharged at the end of a Chapter 7 case. The debtor must choose whether to continue paying for a secured item such as a car or house, or surrender the property and discharge the debt. A typical Chapter 7 bankruptcy case will take around four months, start to finish, and the debtor will not lose any property.
In a Chapter 13 case the debtor repays all or part of her debts in installments to creditors over three to five years. The repayment period cannot exceed five years. The debtor proposes a plan to repay creditors based on the debtor’s projected income. The plan is reviewed by creditors, who may file objections, and is approved or denied by the bankruptcy court. At the end of the repayment plan, many creditors who are not paid in full are discharged. The debtor does not lose property during a Chapter 13 bankruptcy, but must pay creditors an amount equal to what they would have received in a Chapter 7 case.
Some individuals choose to file Chapter 13 to have the opportunity to repay debts over time, like a vehicle or house payment. In some cases Chapter 13 can lower or eliminate these payments. In some rare cases individuals are disqualified from Chapter 7 because their household income allows them to pay a portion of their unsecured debts.
If you are unable to pay your creditors, discuss your options with an experienced bankruptcy attorney. The Bankruptcy Code is very flexible and efficient at reducing, restructuring, and even eliminating debts you can’t afford to pay. The bankruptcy chapters allow you and your attorney to make decisions that can lead to a better financial future for you and your family.