There are two types of consumer bankruptcy.
Each is intended to help consumers in financial crisis, but the solutions
offered are very different.
Chapter 7 bankruptcy, or liquidation,
is more common. A Chapter 7 bankruptcy can eliminate a lot of unsecured
debt (credit cards, medical bills, old utility bills, unsecured personal
loans, etc.), and can generally be completed within just a few months.
In a Chapter 7 bankruptcy case, the trustee can liquidate (sell) non-exempt
assets to pay creditors, but most people who file for Chapter 7 bankruptcy
don’t have any non-exempt assets, and so are able to keep their property
while eliminating unsecured debts.
Chapter 13 bankruptcy is often the
solution of choice for people who have a lot of secured debt, such as car
loans and mortgages, and want to keep the property that serves as security
for the loans. In a Chapter 13 case, the debtor enters into a repayment
plan that allows 3-5 years to catch up on past due payments.
Since the bankruptcy law change in
2005, there have been a lot of misunderstandings about bankruptcy.
For instance, many people have been led to believe that almost no one can
file for Chapter 7 bankruptcy anymore. That’s simply not true. Although
the new bankruptcy law that took effect in October, 2005 added some hoops
for debtors to jump through, consumer bankruptcy attorneys and credit counseling
agencies have found from the beginning that the Chapter 7 means test actually
prevents very few debtors from filing under Chapter 7. In fact, some
credit counseling agencies have said that by the time most debtors come
to them for the newly-required pre-filing credit counseling, they have
no other realistic option! The safety net of bankruptcy is still
available to most consumers in financial crisis.
Chapter 7 bankruptcy and Chapter 13
bankruptcy offer different forms of protection. If you’re facing
a financial crisis, a local bankruptcy attorney can help you determine
whether Chapter 7 bankruptcy or Chapter 13 bankruptcy might be the right
answer for you.
Generally speaking, Chapter 7 bankruptcy
is intended to wipe the slate clean by discharging unsecured debt—debts
like credit card debt, medical bills, and unsecured loans. Chapter
13 bankruptcy, on the other hand, is intended to give a debtor time to
catch up past due payments over a period of 3-5 years, while keeping secured
property like houses and cars.