Bankruptcy is a process governed by Federal law (although Your particular state’s exemptions may apply) designed to help everyday consumers as well as businesses get protection from their creditors. Initially, bankruptcy prevents diligent and continuous efforts by creditors to collect debts. Upon discharge, bankruptcy can completely eliminate some repayment obligations, or provide for a restructuring of some payment obligations, thus enabling the debtor to obtain a fresh financial start. Federal Bankruptcy Law provides for two main types of consumer cases: Chapter 7 and Chapter 13.
Chapter 7 Liquidation
A Chapter 7 bankruptcy petition is typically referred to as a “liquidation”. In a Chapter 7 case, the debtor’s assets are examined by a trustee to determine what assets are not “exempt” and may be sold or recovered for the benefit of creditors. Certain property cannot be liquidated by the trustee because it is exempt. The particular property that may be exempt varies from state to state. In most consumer bankruptcy cases, many of the debtor’s assets are exempt.
At the conclusion of a Chapter 7 case, an eligible debtor will receive a “discharge” from his or her debts, except for certain debts that are prohibited from discharge, such as student loans, taxes and support obligations.
Chapter 13 Reorganization
A case under Chapter 13 is often called a “reorganization”. Reorganization cases under Chapter 13 are very different from Chapter 7 liquidations and require the debtor pay a small percentage of the debt owed to creditors. This percentage s based upon disposable income and must be approved by the bankruptcy court. In addition, the debtor is not required to liquidate assets.
In a Chapter 13 case, the debtor’s attorney submits a plan to repay creditors over a three to five year period, usually funded by disposable income as determined by the means test and future income estimations. If the plan is confirmed by the bankruptcy court, the debtor’s payments under the plan are distributed to creditors by the Chapter 13 trustee. Upon successful completion of the plan, and all required payments having been made to the bankruptcy court, the debtor receives a discharge similar to that received in Chapter 7.
