The two most common forms of bankruptcy are Chapter 7 and Chapter 13. Chapter 7, also called “straight bankruptcy,” arranges for complete liquidation of debt. In exchange the creditor has to surrender all his non-exempt assets via liquidation and ensuing distribution to the creditors. Chapter 13 bankruptcy also called “reorganization,”allows the debtor to reorganize his debt structure over 3-5 years. To be eligible for Chapter 13, the creditor needs to demonstrate to the court that he has sufficient income to repay his debts. If approved he must submit a detailed payment plan.
Chapter 7 bankruptcy is generally most used for debtors who have few property assets, except for their basic furniture and house necessities, and who have little money left over at the end of the month, or may even have trouble meeting basic expenses.
The advantages of Chapter 7 bankruptcy are that it provides for total discharge of debts and the process moves rapidly. Once the debtor has filed bankruptcy, his creditors cannot contact him directly.
To qualify to file Chapter 7, a debtor needs to pass the means test, which determines is his total income is under a certain specified amount.
Chapter 13 bankruptcy is appropriate for debtors who have large amounts of equity, have a steady monthly income and other assets, but are incapable of keeping up with their monthly credit payments. Debtors accepted for a Chapter 13 bankruptcy agree to work out a 3-5 year plan (longer in the future), and will cooperate a credit counselor to pay their debts. Monthly payments are sent to the “debt trustee,” who apportions the money to creditors according to a pre-arranged dispersal plan. Payments in this form of bankruptcy are made from disposable income that remains after basic expenses are met, food clothing, shelter, etc. To be eligible for Chapter 13 bankruptcy a debtor must have unsecured debts below $360,475 and secured debts are less than $1,081,400.
In both Chapter 7 and Chapter 13, the debtor must obtain mandatory credit counseling within 180 prior to filing bankruptcy with the courts. The counseling is designed to give debtors a chance to solve their financial problems themselves and with the help of the course counselors, without the need to go to court. In addition, this course, as well as additional courses that people in bankruptcy must take, aim to teach people in debt how to manage their finances so they won’t go into debt again after they come out of bankruptcy.