Bankruptcy is a federal debt relief process that allows individuals, businesses, or farmers to obtain federal protection for elimination or reduction of their debts. (A debtor may also repay all of their debts under revised repayment terms as well.) There are two main types of bankruptcy – re-organization and liquidation.
Chapter 7, which is a liquidation bankruptcy, is the most common bankruptcy and is filed by consumers. Chapter 13, which is a re-organization bankruptcy, is gaining in popularity since congress passed an act in 2005 preventing abuse of chapter 7 bankruptcy filing (filing chapter 7 when the debtor was able to pay off their debts) A chapter 7 bankruptcy is known as a liquidation bankruptcy because when you file under chapter 7, your bankruptcy trustee will take any of your non-exempt property and sell (liquidate) it to repay your creditors (ie, the people you owe money to.) However, some of your property is exempt in bankruptcy and you will be able to keep it. In many cases the debtor has very little or no non-exempt property. Many cases are no asset cases.
Once your bankruptcy case is completed most your unsecured debts are erased with the exception of some non-dischargeable debts such as child support, divorce payments, back taxes that are not older than three years and debts owing to government entities. In some cases, you will not be eligible to file chapter 7 if your income is too high for your location and household size. If your average monthly income is greater than your county’s median income, you must complete the long form version of the bankruptcy means test to determine if you qualify. If the means test shows you are not eligible to file chapter 7, you will still be able to file for bankruptcy, however you will have to file chapter 13.
There are two other common chapters of re-organization bankruptcy – chapter 11 and chapter 12.
Chapter 11 bankruptcy is for businesses that are facing financial struggles and is similar to Chapter 13. Individuals are also eligible to file chapter 11, but this is only done in exceptional circumstances such as when the debtor has more debts than the chapter 13 limits allow.
Chapter 12 bankruptcy is exactly like a chapter 13 bankruptcy, however 80% of the eligible debts must be from a family farm operation. Chapter 12 bankruptcy has higher debt limits than chapter 13, to accommodate for the large costs with operating a farm. Chapter 12 bankruptcy is extremely rare.
Chapter 13 bankruptcy is the most common reorganization bankruptcy for consumers, while chapter 11 bankruptcy is the most common reorganization chapter bankruptcy for businesses. When you file a reorganization bankruptcy, you are agreeing to a payment plan with your creditors – with protection from the bankruptcy court – to repay off a portion (or in some cases all your debts, at reduced interest) of your debts over a period of three or five years. The amount you will pay will depend on several factors such as what you owe, your average monthly income and your state’s average income. In a Chapter 13 bankruptcy, the creditors and/or trustee may object to the terms of your proposes bankruptcy plan. You must then work with the parties to resolve the objections or allow the court to rule on the objections. Also, to be eligible to file for chapter 13 you must have less than $1,010,650 in secured debt and less than $336,900 in unsecured debt. Secured debt is a debt secured by an asset (such as a car) while unsecured debt is debt that has no asset (such as credit card debt.)