Types Of Bankruptcy Depend On Individual’s Situation

For individuals there are two types of bankruptcy including Chapter 7 in which all of their debts are essentially eliminated and Chapter 13, in which their debts are paid off over a five-year period, supervised by a trustee of the court. Businesses can use a Chapter 11 bankruptcy during which they can reorganize their debt until it paid off or renegotiated in order to remain in business until their financial house is back in order.

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An initial consultation with a bankruptcy attorney will help determine which of the types of bankruptcy the individual qualifies to file. There are certain tests administered to determine if the individual qualifies to file Chapter 7 under the new bankruptcy laws. Essentially, an income calculation will determine if the person has a current monthly income, after allowable expenses that is 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. Of the two types of bankruptcy, Chapter 7 offers the most financial relief for the creditor.

Paying Off Debt Over Time

If a person does not qualify for Chapter 7 bankruptcy, they might consider a Chapter 13 plan, which requires making monthly payment to a court trustee who then sends payments to all creditors listed as part of the repayment plan. Of the two types of bankruptcy this helps a person meet their financial obligations while keeping creditor’s from taking collection actions against the debtor.

In the past, many people may have started out in Chapter 13 bankruptcy and found they were unable to meeting the obligation and moved into Chapter 7. 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. If the person has the means, current income level, to pay off their debts, they are restricted to filing for Chapter 13.

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. Payments to unsecured creditors are made last in the line for recovering money owed.