Common Types of Bankruptcy

There are two types of bankruptcy proceedings that apply to most individuals: Chapter 7 and Chapter 13.  The names refer to the chapter of the federal Bankruptcy code that governs each proceeding.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most common type of bankruptcy filing. Under Chapter 7, the debtor’s assets / personal property are liquidated /sold and the proceeds are used to pay creditors. A Chapter 7 filing may result in the loss of all non-exempt property, a complete discharge of all eligible debts, and no further obligation to pay discharged debts in the future. There are certain debts that are non-dischargeable under Chapter 7, such as mortgages, liens (such as car loans), child support, alimony or debts incurred through fraud.

A debtor must pass the Means Test to qualify for Chapter 7 bankruptcy. Simply put, the Means Test evaluates a debtor’s income to determine if he is in need of Chapter 7 relief.  If a debtor passes the Means Test, he is permitted to file for Chapter 7 bankruptcy; if not, he may file for Chapter 13 bankruptcy.

Read more about Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy typically applies to individuals who have enough money to pay their living expenses, but not enough income to completely/promptly pay other outstanding debts.  In general, Chapter 13 is a repayment plan in which a debtor agrees to pay creditors part or all of his debts over a 3-5 year period. The debtor is allowed to keep his property as long as he makes all the payments according to the plan.  Upon completion of the repayment plan, the debts addressed by the plan are discharged and the debtor has no further obligation to pay them.

Chapter 13 bankruptcy also provides a few more dischargeable debts than Chapter 7, such as non-support debts defined by divorce proceedings, debts for willful damage to property and certain criminal fines/penalties.

Read more about Chapter 13 bankruptcy.