What is Bankruptcy?

There are two main forms of personal bankruptcy: Chapter 7 bankruptcy and Chapter 13 bankruptcy.


Chapter 7 Bankruptcy: The Debt Discharge

Chapter 7, the U.S.’s most common form of bankruptcy, is typically filed in a federal court when an individual or business facing a great deal of debt is unable to pay it.

A successful Chapter 7 bankruptcy results in the Chapter 7 debt discharge, which eliminates the filer’s unsecured debt, such as:

• credit card debt

• payday loans

• personal loans

• utility and medical bills

Keep in mind, a person must prove eligibility to file Chapter 7 bankruptcy.

In general, that means they must typically make less than their state’s minimum income level.




Chapter 13 Bankruptcy: The Wage Earner’s Repayment Plan

Chapter 13 bankruptcy, also known as the wage earner’s plan, is often an option suitable for those facing foreclosure or looking to reorganize finances within the confines of a court-approved, debt repayment plan.

Supervised by a federal court, Chapter 13 bankruptcy gives some income-receiving debtors the ability to:

• stop foreclosure

• silence creditors

• get on a more realistic, interest-free debt repayment plan

• possibly receive a discharge from unsecured debts

At the beginning of the Chapter 13 repayment period, which normally lasts three to five years, a court-appointed trustee is assigned to an individual case and thereupon acts as the go-between for the debtor and creditors.

The trustee receives a set monthly payment from the debtor to give back to creditors regularly or as specified in the court-ordered plan.

Exceptions to these payment types are current mortgage payments and some leases. At the completion of the plan, debts are usually discharged, or legally forgiven.

Once the discharge is entered by the court, no creditor who had notice of the bankruptcy can attempt to collect debt unless it is categorized as “non-dischargeable”, examples being some forms of criminal restitution, domestic support or student loans still not paid in full.

With every year that passes after filing bankruptcy, its record on a credit report is typically viewed with less scrutiny.