Bankruptcy is a legal procedure allowing businesses and individuals to either eliminate debts owed or structure a repayment plan. It’s normally a procedure used as a last resort when you’re out of financial options.
Once it’s decided to go forward with bankruptcy, it’s then a simple matter of filing a petition with the court. Your petition will include a list of all debts, income, assets and other needed financial information.
Two Main Bankruptcy Categories
In a general sense, bankruptcy is used to either reorganize debt through repayment or pay off debt through liquidation of assets. A Chapter 7 bankruptcy resides in the liquidation category. Chapter 11 and Chapter 13 are examples of reorganization plans.
Chapter 7 Bankruptcy
A Chapter 7 filing normally takes 3 to 6 months to move from beginning to end (discharge). You must prove eligibility in order to qualify for Chapter 7. Part of the qualification involves proving that you don’t earn enough income to afford a Chapter 13 repayment plan.
The court will determine whether you have any assets that get liquidated to pay back your creditors. You do have protection in this area through what’s called “exempt property.” Exempt property usually means your personal home and car are safe from liquidation.
If you owe a secured debt, you’ll need to decide between 3 main options:
- continue making payments
- allow repossession by the creditor
- pay the creditor for the replacement value of the asset
Your unsecured debt (credit cards, medical bills, etc.) is usually wiped out during Chapter 7. You won’t be able to eliminate any school loans, child support, taxes, or alimony.
Chapter 13 Bankruptcy
You’ll file Chapter 13 if it’s revealed that you have enough income to cover a repayment plan.
After filing, you need to work out with the court the repayment plan. Most plans last three to five years. The total repayment amount and monthly payments are determined, in part, by the amount of debt owed and your income. Another factor is how much any unsecured creditors may have received if you had done a Chapter 7 filing.
The court may allow you to start repaying your secured debts while keeping the property safe from repossession, may be the case even if your payments are in arrears. Any late payments are sometimes lumped into the overall repayment plan so you can pay them off over time.
Bankruptcy isn’t to be taken lightly. It will affect your credit score and report for the next ten years. Think through whether you can pay down debt without filing. If you simply can’t continue without bankruptcy, however, it might be your best option.