Bankruptcies are also known as "reorganisations" or "liquidations," depending on the type of bankruptcy you choose. Both a "Chapter 7" bankruptcy and a "Chapter 13" bankruptcy are federal court processes that help businesses or consumers get rid of their debt or pay it back while the bankruptcy court protects them.
"Liquidation" is the term for a Chapter 7 bankruptcy. If you own property, it is sold (called "liquidating") and the money is used to pay off as many of your debts as possible and give you enough to start over.
Chapter 13 bankruptcy is called "reorganisation," and it is by far the most common type of consumer bankruptcy. When a consumer files for Chapter 13, they usually have three to five years to pay back their debts with the help of the bankruptcy court.
If you're thinking about filing for bankruptcy, you should know that both types have exceptions about what kinds of debts are covered, who can file for bankruptcy, and what kinds of property you can keep during bankruptcy.
Chapter 7 Bankruptcy
Liquidation bankruptcy, also called Chapter 7 bankruptcy, can be filed by people or businesses who are sure they can't get out of debt on their own.
If you file for Chapter 7 bankruptcy, you will probably have to sell some of your property (if you own any) to pay off some of your debt. When you do this, the Chapter 7 bankruptcy will wipe out most of your unsecured debts, if not all of them. Some property is exempt from state and/or federal laws, which means you probably won't have to sell your clothes, car, or furniture. If you don't have much, your case might be called a "no asset" case, and any property you do have will probably be exempt.
Recent changes to the bankruptcy law mean that anyone who wants to file for bankruptcy must first go through credit counselling, budgeting, and debt management counselling with an approved counselling company before their debts will be erased. People with higher incomes won't be able to file for Chapter 7 bankruptcy. Instead, they will have to pay at least some of their debts through a Chapter 13 bankruptcy.
Chapter 13 Bankruptcy
Chapter 13 is for people who are still working and making money. It "rearranges" "the person's debt so that he or she can start making payments to start paying off the extra costs over a period of three to five years.
Chapter 13 bankruptcy is a good way to fix your finances and keep your home, if you have one. Under a Chapter 7, you almost always have to sell your home, but a Chapter 13 can stop your home from being taken away by the bank.
For bankruptcy, you have to get credit counselling.
Before a person or business can file for a Chapter 7 or Chapter 13 bankruptcy, they must get credit counselling from an agency that is approved by the United States Trustee's office. This is required because many people find out after counselling that they don't need to file for bankruptcy and can get out of debt by making an informal plan to pay back their debts. You have to go through the counselling programmes before you can file for bankruptcy, but you don't have to use the repayment plan that the agency gives you.
When your bankruptcy case is over, you have to go to another counselling session where you learn how to handle your money. This session will teach you how to manage your money well so that you don't get into financial trouble again.
