Types of Bankruptcy

How Chapter 7 Works

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is the most simple way to eliminate debt. This process discharges, or wipes out, unsecured debts, such as:

  • Credit card bills
  • Medical expenses
  • Personal loans
  • Debts from repossessions of vehicles
  • Debts from foreclosures

Technically, Chapter 7 bankruptcy involves selling your non-exempt assets to pay a portion of your unsecured debt to your creditors. However, most people who file retain a majority of their assets due to exemptions. Typically, if you are able to maintain payments on your house or car, you will be able to keep those assets.

Chapter 7 Eligibility

The means test is not often a serious problem for people seeking to file for bankruptcy. However, even if you do not meet the Median Income qualification test to file a Chapter 7 bankruptcy petition, you still may be eligible to file under Chapter 7.

In 2005 the credit card companies and the banks lobbied Congress to pass what is called the “Means Test.” This is a rigid and unrealistic test to determine whether you “qualify” for a bankruptcy.

The essence of this test is that your gross income (before any deductions) is compared against the median income for your geographic region, and then “permitted” expenses are subtracted. After that test, if you make more than the median income, even if it is by one penny, then there is a “presumption of abuse” and you must then prove you are actually facing difficulty. Your individual circumstances are totally irrelevant to this test.

For most people considering bankruptcy, this test will not be problem. But you must consult with an attorney to know whether you will qualify. This test is very complex, and there are many rules which have to be followed. In fact, it is deliberately complex to make filing bankruptcy harder. Sp do not assume that you qualify for bankruptcy. Talk to an attorney.

Chapter 11

Chapter 11 is typically used by financially struggling businesses to reorganize their affairs. It is also available to individuals, but because Chapter 11 bankruptcy is expensive and time-consuming, it is generally used only by those whose debts exceed the Chapter 13 bankruptcy limits (rare) or who own substantial nonexempt assets (such as several pieces of real estate).

If you are considering Chapter 11 bankruptcy, you’ll need to talk to a lawyer.

Chapter 12

Chapter 12 is almost identical to Chapter 13 bankruptcy, but to be eligible for Chapter 12 bankruptcy, at least 80% of your debts must arise from the operation of a family farm.

Chapter 12 bankruptcy has higher debt ceilings to accommodate the large debts that may come with operating a farm, and it offers the debtor more power to eliminate certain types of liens. Very few people use Chapter 12 bankruptcy; if you want to join their ranks, you should consult with a lawyer.

Chapter 13

Chapter 13 bankruptcy is also known as “wage earner” bankruptcy because, in order to file for Chapter 13, you must have a reliable source of income that you can use to repay some portion of your debt.

When you file for Chapter 13 bankruptcy, you must propose a repayment plan that details how you are going to pay back your debts over the next three to five years. The minimum amount you’ll have to repay depends on how much you earn, how much you owe, and how much your unsecured creditors would have received if you’d filed for Chapter 7 bankruptcy.

Debt Limits
Your debts must be within limits set by the federal government: Currently, you may not have more than $1,010, 650 in secured debt and $336,900 in unsecured debt.

Secured Debts
If you have secured debts, Chapter 13 gives you an option to make up missed payments to avoid repossession or foreclosure. You can include these past due amounts in your repayment plan and make them up over time.

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