Basic Details on Bankruptcy Filing

Two Types

Anyone considering bankruptcy, whether due to overwhelming debt or an unpaid tax burden, will need to know that a bankruptcy filing can fall under two headings. These are the Chapter 7 and Chapter 13 headings. The most fundamental difference between the two types is that the Chapter 7 bankruptcy filing will totally erase the debt while the Chapter 13 bankruptcy filing allows debt to be adjusted and put on a sort of payment plan.

How It Is Done

Chapter 7 is done as a sort of liquidation of available assets in exchange for elimination of the debt. For example, before the debt is written off the individual who is filing will work with the creditors, the bankruptcy trustee, and the courts to identify any assets that can be given over in exchange for a discharge of the debt. For instance, if the individual who is filing for bankruptcy owns two cars that are free of liens they may be required to sell one and to hand over the monies to be divided between creditors. This method of filing is normally the way that people with few or no sell-able assets and a lot of debt will handle their financial troubles.

Additionally, the individual filing for Chapter 7 bankruptcy must be able to demonstrate where any sell-able assets may have gone in the weeks or months leading up to the filing. For example, if they did own two cars approximately six months before filing and yet when they filed they were down to only a single car they would have to demonstrate to the court where the vehicle (and any proceeds from the sale) may have gone.

The Chapter 13 variety is more of a debt adjustment program and allows the individual to stop the process of foreclosure or collections and liens while they pull together a repayment plan with their creditors. This is usually the way people with saleable assets will handle their financial scenario in order to retain their property, and even some of their savings. Though state laws vary, some might allow the individual to retain ownership of their primary home, vehicle, and even some savings through the use of the Chapter 13 format.

What Is Covered

When someone is using the Chapter 7 variety of bankruptcy they will be able to see many kinds of debt eliminated (including credit card debt and some tax debts), but they usually cannot erase such items as child support payments, alimony payments, student loans, and fees or liabilities that are connected to fraud, drunk driving settlements, or criminal penalties.

Those using the Chapter 13 bankruptcy filing format will need to understand how the process views different levels of debt. For example, there are three types commonly addressed during the process; priority, secured, and unsecured. Priority debts must be reorganized in a way that allows them to be paid in full and usually plus any interest that accrues. The secured debts in any bankruptcy filing of the Chapter 13 type must also be paid in full, along with interest accrued, but the payment plan will vary far outside the original agreement (this is debt secured through collateral, such as a mortgage). The unsecured debts are the only ones that may demand only a percentage of the original amount due, and this is going to vary according to the remaining income and the number of creditors.

The After Effects

Any bankruptcy filing comes with the potential for long-term damage to the individual credit score or history. The fact that a bankruptcy occurred remains on the record for some time, but it is generally the number of accounts covered by the bankruptcy that has more of an impact than the actual bankruptcy itself.

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