Chapter 7 is the most common type of bankruptcy. It is often referred to as liquidation, meaning assets are liquidated to cover debts. Statues define which assets will be liquidated. In a Chapter 7 bankruptcy, debtors select property they are eligible to keep from a list of state exemptions. An appointed trustee handles the liquidation sale of assets and money transfer to creditors.
Typically, Chapter 7 bankruptcy is chosen when there are few assets and when credit card debt and other unsecured bills are involved. Filing for a Chapter 7 bankruptcy may discharge all debts. A discharge releases individual debtors from personal liability for most debts and prevents creditors from going after those debts. Certain debts can never be eliminated through Chapter 7 bankruptcy, including:
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made significant changes in filing for bankruptcy. Before the law, anyone could file for a Chapter 7 bankruptcy. Now, your income, which may not be higher than the median income for your state, determines whether you can file for a Chapter 7 bankruptcy.
Additionally, under the law, debtors must undergo bankruptcy credit counseling with counselors approved by the U.S. Trustee’s Office before filing for Chapter 7. Provisions of the new law require more stringent proof of debt and documentation.
Chapter 13 bankruptcy is a way for individuals to repay their debts. The main advantage of Chapter 13 bankruptcy over Chapter 7 is the opportunity for individuals to save their homes from foreclosure.
With a Chapter 13 bankruptcy, the debtor usually repays a portion owed to creditors under a plan over three to five years. As long as a debtor’s equity does not exceed certain limits, a Chapter 13 bankruptcy allows the debtor to keep property such as a home and vehicle, which may be exempt according to state laws. A benefit of a Chapter 13 is the time period the bankruptcy shows on a debtor’s credit report, which is less than with a Chapter 7. The time it takes to rebuild a credit rating after filing for Chapter 13 also is less.
Most recently, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 initiated changes in the procedures for filing bankruptcy to involve more stringent documentation and more restrictive qualification requirements. The law now requires individuals seeking bankruptcy relief to undergo credit counseling with approved counseling agencies before filing a bankruptcy petition and to obtain education in personal financial management from approved agencies.