Money BlogTypes Of Bankruptcy - What Are The Differences?

Aug

7th

Types Of Bankruptcy - What Are The Differences?

Files under money | Posted by Chris Safin

by Chris Safin

If you are an individual in the US you can apply for two different types of bankruptcy. The first is chapter 7 which can totally eliminate all of the individual’s debts. The second is chapter 13; with this option the individual’s debts will be paid off during the following five years.

Businesses cannot file under chapter 7 nor 13, they must instead file under Chapter 11. They will be able to use Chapter 11 to renegotiate their debt and too generally reorganize them so they can get back on the road to financial health.

A quick consultation with a bankruptcy attorney will help determine which of the types of bankruptcy the individual qualifies to file under. There are certain tests administered to determine if the individual qualifies to file Chapter 7 under the new bankruptcy laws.

Basically, an income calculation will determine if the person has a current monthly income, after allowable expenses that are less than the average income in the state in which they reside. If their income is higher than the average, they will have to file for Chapter 13 bankruptcy.

In Chapter 7 bankruptcy, all debts, including secured and unsecured can be discharged. However, some assets owned by the individual may be confiscated and sold by the court in order to satisfy a portion of the secured debt.

Clearly out of chapter 13 and chapter 7 bankruptcies, it is chapter 7 which will provide the most financial relief.

Paying Off Debt Over Time

If the individual cannot qualify for a chapter 7 bankruptcy, they will still be able to file for chapter 13. In doing so they will be obligated to make payments on a monthly basis to a court trustee, who will in turn send out the payments to the individuals different creditors.

Chapter 13 will allow the individual to honor their financial obligations and at the same time stop creditors from demanding collection actions against the debtor.

Many people often used to start with I chapter 13 bankruptcy, but then found themselves financially incapable of meeting their obligations and so managed to move into a chapter 7 bankruptcy.

Under the new bankruptcy laws, which went into effect in 2005, the choice between the two types of bankruptcy is determined by the courts means test.

So quite simply if the person has the means (the current income level), so as to be capable of paying off their debts, they will have absolutely no choice but to go for a chapter 13 bankruptcy.

On either of the types of bankruptcy, any assets or initial payments will be directed to those creditors that have what is considered priority access such as past due income taxes, student loans and other government obligations.

As soon as all of your creditors that have qualified for priority access have had all debt paid, the paying of all your unsecured creditors will then start to take place.

When you’ve filed bankruptcy the fact that you have done so can stay on your public record for as long as 10 years into the future! So you really must carefully consider all your options before taking on a bankruptcy, bankruptcy should always be your last option.

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