Bankruptcy is an option for individuals who are at a point where they can’t repay all of their debts. Technically, there are six (6) different types (or ‘chapters’) of bankruptcy in the United States: Chapter 7; Chapter 9; Chapter 11; Chapter 12; and Chapter 13. But for this post, we’re just going to focus on bankruptcy chapters for individuals, i.e. Chapters 7 and 13. Below is an overview of these two (2) common bankruptcy types:
Chapter 7: Liquidation
Chapter 7 Bankruptcy (oftentimes referred to as ‘liquidation’ bankruptcy) is perhaps the most common and basic form of bankruptcy in the United States. Chapter 7 eliminates most of an individual’s unsecured debt (credit cards, medical bills, etc.). Chapter 7 also provides liquidation of an individual’s property and then distributes it to creditors. Individuals can decide to keep or surrender “exempt property” (home, car, pension, personal belongings, etc.), provided they keep making the payments on any debt they secure.
- Effect on Debts: Unsecured debts are forgiven.
- Resolution Timeframe: 3-6 months.
Chapter 13: Adjustment of Debts of an Individual with a Regular Income
Chapter 13 Bankruptcy is known as a “wage earner plan” because an individual that has regular income is allowed to develop a plan to pay back parts or all of their debts. Chapter 13 doesn’t eliminate debts, but rather it restructures them into a new affordable monthly payment. One advantage of Chapter 13 over Chapter 7 is that it allows individuals to avoid foreclosure on their homes and retain their vehicles under the terms of the payment plan.
- Protection from Repossession: Yes.
- Effect on Debts: Debts must be paid, but amounts might be lowered.
- Resolution Timeframe: 3-5 years.