What Types of Bankruptcy Can an Individual File

Summary: To be relieved from debt burdens, individuals may file for bankruptcy. Under what Chapter of the bankruptcy code can a person file his petition? What are the eligibility requirements for each type of bankruptcy?

What will happen afterwards once he has filed for bankruptcy? Will he be able to retain some of his properties? Find out the answers to these.

For heavily-indebted individuals, legislators have made Chapters 7 and 13 of the bankruptcy code to help them start a new or alternatively, manage debt payments better. While this may sound very favorable to debtors, a bankruptcy, actually, also means disposal of assets to pay creditors. Amidst incessant phone calls from creditors, for example, the court, after receiving the debtor’s filing could call a time off, and set order on how creditors should be paid.

Personal Bankruptcy Under Chapter 7

Generally, under Chapter 7, most of the debtor’s unsecured debts are cancelled, whether or not they were paid in full. This applies to the debtor’s unsecured notes, debts, and loans because his other debts like alimony, child support, student loans and tax bills would still remain even in bankruptcy. The process of settling secured debts will also depend on the bankruptcy filing, the state where the filing was made, among other factors.

To generate money to pay credit card bills and loans, the court sells the debtor’s un-exempt assets under Chapter 7. That is why Chapter 7 is called liquidation. Unexempt properties under Chapter 7 include a second vehicle or a second home. The order of payment is: privileged creditors (secured creditors) get the proceeds of the liquidation first, and the general creditors get whatever is left. If there is not enough money to go around even after all of the assets that could legally be sold out of the debtor’s bankruptcy estate are disposed of, some general creditors may not get anything at all.

In the bankruptcy process, legal contentions might arise. Some creditors might dispute how assets were classified as exempt and non-exempt. Unexempt property classificaton under Chapter 7 includes, a second vehicle or a second home. Exempt properties, those that a debtor are allowed to keep includes a reasonable amount of clothing, household goods, and furnishings, and motor vehicles of up to a particular worth. Also, the debtor might choose to file bankruptcy for his company at the same time, complicating even further how some provisions of the law should be interpreted.

Personal Bankruptcy Under Chapter 13

Chapter 7 not only wipes off most of the debtor’s debts, but also his personal properties. Under Chapter 13, he might retain some of these but with an agreement to the debt over a period of time. That is because it is understood that under Chapter 13, the debtor, after some negotiations with creditors, has still enough income to satisfy debt obligations under a new or modified term.

How to Determine Whether to File for Chapter 7 or 13

The 'means test' introduced in October 2005 determines whether an individual is qualified to file for Chapter 7 or 13. A debtor earning less than the average income in the state where the person resides may qualify to file for Chapter 7 bankruptcy. If he earns more than the average, but his excess income is still insufficient to pay some amount designated by law at a reasonable period of time, he may still qualify for Chapter 7. Chapter 13 is applicable for a person earning regular income and with secured and unsecured debt belonging to a particular bracket; and for those who properly filed federal and state income tax returns for the last four years before the bankruptcy filing. To check for qualification, visit www.usdoj.gov.