Bankruptcy Fundamentals

Bankruptcies can be called "reorganizations" or 'liquidations", depending on which type of bankruptcy you decide to do. Both a "Chapter 7" and a "Chapter 13" bankruptcy are federal court processes that are meant to assist businesses or consumers to get rid of their debt or to repay the debt with protection provided by the bankruptcy court.

A Chapter 7 bankruptcy is considered a "liquidation". If you own property, it is sold (liquidated) and the profit is used to pay off as much of your debts as possible and leaving you with enough to start over.

A Chapter 13 bankruptcy is a "reorganization" and is by far the most common type of consumer bankruptcy. Consumers who file a Chapter 13 typically repay their debts over a period of three to five years under the protection of the bankruptcy court.

If you are considering bankruptcy, you should understand that both variations of bankruptcy have exceptions regarding which types of debts are covered, who is eligible to file for a bankruptcy and what property you will be allowed to keep during a bankruptcy.

Chapter 7 Bankruptcy
For individuals or businesses that are convinced there is no way to get themselves out of the debt they've gotten into, a liquidation bankruptcy (also called a Chapter 7), can be filed.

When you file Chapter 7 you will probably be required to sell some of your property (if you own any) in order to pay down some of your debt. When you do this, the Chapter 7 bankruptcy will then erase most (if not all) of your unsecured debts. Some property is considered exempt under the state and/or federal laws- meaning you probably will not have to sell your clothing, car or household furniture. If you don't happen to own very much, your case may be considered a "no asset" case, and what property you do have will likely be considered exempt.

Recent changes to the bankruptcy law mean that any debtor wanting to file for a bankruptcy must first undergo credit counseling, budgeting and debt management counseling with approved counseling companies before debts will be removed. Individuals with higher income levels will not be permitted to file a Chapter 7 Bankruptcy and instead will be required to pay at least some of their debt under a Chapter 13.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is for individuals who are earning money. It 'reorganizes" the debt to make it possible for the individual to make payments to start paying off the excessive expenses with installments and over a period of three to five years.

Using Chapter 13 bankruptcy is a good way to repair your financial situation, and keep your home if you have one. Under a Chapter 7, you are almost always required to sell your home; while a Chapter 13 can keep you from going into foreclosure.

Credit Counseling Requirements for Bankruptcy

Credit counseling must be completed through an agency that is approved by the United States Trustee's office before any person or business entity will be entitled to file for a Chapter 7 or Chapter 13. The reason this is required is because many individuals discover after they've undergone the counseling that they do not need to file bankruptcy, and can get themselves out of debt using an informal repayment plan. While you are required to participate in the counseling programs prior to filing for a bankruptcy, you are not required to use the repayment plan the agency might propose to you.

When the bankruptcy case has ended, you are required to attend another counseling session that teaches you about personal finance management. This session is designed to help you from getting into financial difficulties again with effective financial management.