What Is Bankruptcy?

Bankruptcy was designed by the government to aid consumers and businesses rid of themselves of their debts or repay them under protection of the bankruptcy court.  There are generally two types of bankruptcy: Liquidation and reorganization.

Liquidation is where your private property is sold in order to pay off as much debt as possible while leaving you enough property to start over.  The more common type of bankruptcy is reorganization in which your debts are reorganized and you pay them over a three to five year period.

Even with bankruptcy, not all debts are eliminated.  To view more details, see Bankruptcy: What will it solve?

Chapter 7 Bankruptcy (Liquidation) - Summary

Chapter 7 Bankruptcy can be filed by individuals or businesses and lasts three to six months.  As mentioned above, some of your assets may be sold in order to pay of as much of your debt as possible.  Many assets are protected by law and are known as "exempt" assets.  These include clothes, cars, and other household items. 

If you have any secured loans you will need to negotiate directly with the creditor.  Your creditor may require you to repay a lump sum equal to the current value of the asset or decide you continue making payments as outlined by the contract.

Many are no longer eligible for Chapter 7 bankruptcy.  If your income is sufficient enough to restructure under a Chapter 13 bankruptcy your options will be limited to the Chapter 13.

Learn more about Chapter 7 bankruptcy >>

Chapter 13 Bankruptcy (Reorganization) - Summary

Chapter 13 bankruptcy is also known as "wage earner" bankruptcy. This is because you must have a steady source of income that can be used to pay back some of your debts. There are also limits of the amount of debt that can be settled with Chapter 13 bankruptcy. Your secured debts cannot exceed $922,975 while your unsecured debts must be lower than $307,675.

The next step in the reorganization process is to propose a plan that explains in detail how you intend to pay back the debts over a three to five year period. There are many variables that go into how much you will be expected to pay back including your debt-to-income ratio and how much your unsecured creditors would get if you filed for Chapter 7.

Chapter 13 bankruptcy also allows you the option to make up previously missed payments. Because of this, you can potentially avoid repossession or foreclosure. These missed payments must be included in your repayment plan.