The Different Types of Personal Bankruptcy

If you want to use the federal bankruptcy laws to address personal financial challenges, you must generally file a petition under Chapter 7 or under Chapter 13. Regardless of the type of filing, you will immediately be entitled to what the bankruptcy law calls the “automatic stay.” This is a court order prohibiting your creditors from calling, writing or contacting you in any way (or taking any legal action against you) to collect the debt, other than through the bankruptcy process.

In a Chapter 7 proceeding, you are allowed to permanently discharge certain debts in exchange for the sale of some of your assets. Some types of debt may not be discharged—child and spousal support arrearages, student loan payments and certain tax obligations are generally excluded. On the other hand, both federal and state laws establish property exemptions, so that you can discharge debt and keep some of your assets.

Under the provisions of the 2005 revisions to the bankruptcy laws, to qualify for Chapter 7 protection, you must now demonstrate to the bankruptcy court that you lack the means to pay your creditors over a three-to-five year period. If you fail the “means test,” your sole recourse in personal bankruptcy is a Chapter 13 filing.

In a Chapter 13 petition, known as a “debtor’s reorganization,” you are allowed to try to work out new payment arrangements with your creditors, typically over a three-to-five year period. If you are successful in setting up new arrangements, your creditors must abide by the terms, and cannot contact you or otherwise attempt to collect the debt. If, however, you don’t keep the terms of your agreement, your creditors can seek to have the Chapter 13 terminated, allowing them to renew all efforts to collect from you.

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