When people are overwhelmed by their debts, bankruptcy may be a good option. Most individual debtors file for bankruptcy under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 7 is known as a liquidation bankruptcy, and it is appropriate for people who meet the means test and who have unsecured debts. Chapter 13 is a good option for people who do not meet the means test, who have certain debts that cannot be discharged through bankruptcy or who are facing foreclosure of their homes.
How Chapter 13 works
When a person files for Chapter 13 bankruptcy, he or she proposes a repayment plan for his or her debts. This plan lasts between three and five years. Upon filing the petition, the court issues an automatic stay enjoining the creditors from engaging in any further collection activities, including garnishments, foreclosure proceedings, levies and lawsuits. The creditors have the right to object to the proposed repayment plan and to propose their own. If a plan is approved, then the debtor makes payments to the bankruptcy trustee. The trustee disburses the payments to the creditors according to the plan.
What Chapter 13 can do for nondischargeable debts and for mortgage delinquencies
Certain categories of debt are never able to be discharged in bankruptcy. These include domestic support obligations, criminal restitution, personal injury civil judgments if they were alcohol-related, certain tax obligations and in most cases, student loans. These categories of debt are called priority debts. The repayment plan allows people more time to pay back the delinquencies owed for these priority debts. Similarly, a Chapter 13 bankruptcy repayment plan allows delinquent homeowners up to five years to catch up the amount that they owe so that they can save their homes from foreclosure.
Some people may find that Chapter 7 bankruptcy is a more appropriate option for them. A bankruptcy lawyer may advise you which chapter is more appropriate for you depending on your income, your debt level and the specific types of debt that you have. No matter what your financial situation might be, bankruptcy may provide you with a fresh financial start so that you can move on with your life.
