Bankruptcy permits consumers and businesses to eliminate their debts and repay their creditors in an orderly manner. Navigating the process can be complex but an experienced bankruptcy attorney can help. If you can prove that you are entitled to file for bankruptcy protection, the court will provide you or your business with various protections while your case is ongoing. Individual and small business bankruptcies tend to fall under two categories:
Most individuals and businesses file under Chapter 7 and Chapter 13. Liquidation typically occurs in Chapter 7 bankruptcies. While Chapter 7 permits you to keep essential property and assets needed for living, some of your property may be sold to pay your debts. With a few specific exceptions, most of your debts will go away. This often occurs in three to six months after filing your bankruptcy. Chapter 13 permits you to reorganize your debts, and potentially keep more of your property, but requires a repayment plan that is likely to last between three and five years. During that time, you will repay some or all of your debts.
Individuals and businesses are eligible to file under Chapter 7. Depending on the value and type of your assets, some of your property may sold to repay your debts. In return, your unsecured debts go away. The term “unsecured debt” refers to debt that is not backed by collateral. The most common example is credit card debt. Mortgages are secured debt and will usually remain after your bankruptcy. Property required for everyday living is exempt or not subject to sale under this process. If you have property that is not fully exempt due to its value, you may need to repay a portion of the value to your creditors in order to keep the asset.
To be able to file under Chapter 7, you must show that you do not earn enough income after consideration of specific monthly expenses to repay your debts. This is referred to as the “Chapter 7 Means Test” or the “Means Test.”
This is commonly referred to as the “wage earner” bankruptcy. Individuals with regular and reliable income may submit a proposed repayment plan to repay all or some of their debts over a time period of three or five years. Plans are based on income, and the amount and types of debts. Chapter 13 repayment plans allow for the payment of past due mortgages or car payments and back taxes to avoid foreclosure or repossession.
Debts such as child support, alimony, student loans, certain back taxes, and other specific debts are not discharged in bankruptcy, and may be paid through a Chapter 13 repayment plan.