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
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.